In examining the determinants of income, data were collected regarding the chara
ID: 3060159 • Letter: I
Question
In examining the determinants of income, data were collected regarding the characteristics of 45 adults, and the regression lnY = 1 + 2 lnX2 + 3 lnX3 + 4X4 + u was used, where Y is the annual income (in thousands of dollars), X2 is the adult's age, X3 is his/her years of education, and X4 is a dummy variable = 1 and is used if the adult is female. You run the regression and obtain the equation ln = 6.3 + 0.91 lnx2 + 1.3 ln x3 - 0.05x4. How would you interpret the coefficient on years of education?
A. A 1 year increase in education is associated with a 1.3% increase in the wage.
B. A 1 year increase in education is associated with a 1.3 dollar increase in the hourly wage.
C. A 1% increase in education is associated with a 1.3% increase in the hourly wage.
D. A 1 dollar increase in the wage causes a 1.3% year increase in the education.
Explanation / Answer
The right equation is :
lnY = 6.3 + 0.91 lnx2 + 1.3 ln x3 - 0.05x4.
So, Lets only see how Y and X3 are related:
In Y ~ 1.3 InX3, when you get such an equation where both sides have In (natutal log) then we interpret it in this way " A 1 year increase in X (Education) is associated with a 1.3% increase in the wage"
Hence, A is correct