Question

2. Consider the estimated regression equation below and answer the following questions. Assume INCOME is annual household income (in dollars), ENT_EXP is annual entertainment expenses in dollars, and the data comes from a random sample of households in Arkansas (n=200). [25 points]

ENT_EXP =   1500   +    .05 * (INCOME) + e

                       (3.79)     (4.24)

a) What is the expected entertainment spending if income is $45,000?

b) Is the estimate for β1 (coefficient on INCOME) the sign and magnitude you would expect? Why?

c) Test the hypothesis that the impact of a change in income on entertainment spending is statistically significant (different than zero). Use a significance level of 5%. Be sure to show 1) the null and alternate hypothesis 2) your calculation of the t-statistic 3) the p-value and 4) the conclusion. Be sure your conclusion includes whether you should reject or not reject the null as well as the conclusion of the test in words (ie. if you reject the null, what have you just discovered about β1?)

d) Based on the model, how would your entertainment spending change if you receive a raise of $1,000 this year?

BONUS- What other variable should be included in this model and what is its expected sign?

Answer 1

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