Question

The equation below estimates the effect of race on the probability of mortgage denial, holding constant the payment-to-income ratio. Pr(deny 1P/I ratio, black) 2.25+ 2.75P/1 ratio+0.73black) (0.085) (0.16) (0.45) A black mortgage applicant has a P/I ratio of 0.39. What is the predicted probability that his application will be denied? The predicted probability that his application will be denied is 32.73 %. (Express your response as a percentage and round to two decimal places) Suppose that the applicant reduced this ratio to 0.27. What effect would this have on his predicted probability of being denied a mortgage? The predicted probability of being denied a moge wouldbypercentage points (Round your response to two decimal places)

Answer 1

The predicted probability of a black mortgage applicant with P/I ratio .27 is

Φ(-2.25 + 2.75 * .27+ .73) = Φ(-0.7775) .218432

Therefore the new percentage is 21.84%, which is a reduction of (32.73-21.84)%=10.89%

The predicted probability of being denied a mortgage would decrease by 10.89 percentage points.