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

Exercise 5

Consider a model where the return to education depends upon the amount of work experience (and vice versa): log(wage) = ????0 + ????1educ + ????2exper + ????3educ + exper + u.

(i) Show that the return to another year of education (in decimal form), holding exper fixed, is ????1 +????3exper.

(ii) State the null hypothesis that the return to education does not depend on the level of exper. What do you think is the appropriate alternative?

(iii) Use the data in WAGE2.RAW to test the null hypothesis in (ii) against your stated alternative.

(iv) Let _1 denote the return to education (in decimal form), when exper = 10:

????1 = ????1 + 10????3. Obtain and a 95% confidence interval for ????1.

Step 1 of 7

(i)

Holding Exper (and the elements in u) fixed, one will have:

This is the estimated change in proportion in wage variable given one more year of education.