Question

Suppose you’re interested in estimating the effect of family income (In thousands of dollars) on the number of ideal kids a couple wants to have. Your original model is given as follows:

How would you change the model if you think that the effect of family income on the number of ideal kids can be different for individuals living in rural and urban areas?

In the modified model in (a), how would you test whether there is a differential effect of family income on the ideal number of kids that a couple wants to have depended on rural/urban? State the null hypothesis and alternative hypothesis.

Answer 1

Model : health index = bo+ b1family income + u

a)To do part a , we would introduce a dummy variable D  such that

D = 1 IF immigrant

           = 0 IF  non immigrant

so the model becomes

health index = bo+ b1family income + b2D+ u

b) Ho : bo+ b2= 0

Ha: bo+ b2 ≠ 0