Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 11

We used the data in MEAP93.RAW for Example 2.12. Now we want to explore the relationship between the math pass rate (math10) and spending per student (expend).

(i) Do you think each additional dollar spent has the same effect on the pass rate, or does a diminishing effect seem more appropriate? Explain.

(ii) In the population model

argue that 31/10 is the percentage point change in math10 given a 10% increase in expend.

(iii) Use the data in MEAP93.RAW to estimate the model from part (ii). Report the estimated equation in the usual way, including the sample size and R-squared.

(iv) How big is the estimated spending effect? Namely, if spending increases by 10%, what is the estimated percentage point increase in math10?

(v) One might worry that regression analysis can produce fitted values for math10 that are greater than 100. Why is this not much of a worry in this data set?

Step 1 of 6

(i)

Each additional dollar spent seems to have diminishing effect on the pass rate rather than same effect on the pass rate. This is because; of law of diminishing marginal return of dollar spending on the pass rate