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

Exercise 7

Use the data in WAGE2.RAW to estimate a simple regression explaining monthly salary (wage) in terms of IQ score (IQ).

(i) Find the average salary and average IQ in the sample. What is the sample standard deviation of IQ? (IQ scores are standardized so that the average in the population is 100 with a standard deviation equal to 15.)

(ii) Estimate a simple regression model where a one-point increase in IQ changes wage by a constant dollar amount. Use this model to find the predicted increase in wage for an increase in IQ of 15 points. Does IQ explain most of the variation in wage?

(iii) Now, estimate a model where each one-point increase in IQ has the same percentage effect on wage. If IQ increases by 15 points, what is the approximate percentage increase in predicted wage?

Step 1 of 11

Consider the provided WAGE2.RAW data and the provided details to solve the subparts.

The estimated least squares regression equation is given by:

whereis the estimate of slope. The dependent variabledepends on the explanatory variable. The most important part of the above regression line is the slope which depicts the change in predicted value ofdue to one unit change in variable.