Arif collected a sample of 10 individuals. Their income, Y1 and age, age1 are tabulated as below:

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Question 2 (15 marks)

Arif collected a sample of 10 individuals. Their income, Y1 and age, age1 are tabulated as below:

Table 1: Income and Age

Individual Income Age

1 1100 25

2 700 21

3 800 22

4 1200 27

5 1000 26

6 1100 24

7 1500 30

8 1300 28

9 750 22

10 800 23

Arif attempts to estimate the effects of age on income by running the following regression:

Y1=0+g1age+a1 (1)

a) Compute Io and ¡ respectively. (5 marks)

b) Interpret  and ¡2 (2 marks)

c) Show that E(u1) = 0 (3 marks)

d) Explain what does u stand for and why it must be a random variable? (3 marks)

e) Compare the equation ? = + 1a9e1, where Ý = E(YIage1) to Equation 1. Explain

what are the difference(s)? (2 marks)

 

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