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

Exercise 7

Suppose the following model describes the relationship between annual salary (salary) and the number of previous years of labor market experience (exper):

log(salary) = 10.6 + .027 exper.

(i) What is salary when exper = 0? When exper = 5?

(ii) Use equation (A.28) to approximate the percentage increase in salary when exper increases by five years.

(iii) Use the results of part (i) to compute the exact percentage difference in salary when exper = 5 and exper = 0. Comment on how this compares with the approximation in part (ii).

equation (A.28) %?wage ? 100(.094) ?educ = 9.4 ?educ.

Step 1 of 3

The following shows the relation between salary and experience of labor:

(i) The salary can be obtained by substituting the value of experience and taking exponential value of the equation. This is because log (e) or e^log is equal to 1.

The salary when experience is 5 is equal to:

Therefore with o years of experience salary is $40.134.83 and with 5 years of experience salary is $45935.79.