Problem 4 [Regression] For a certain region, Stacy the statistician looks at var

Question

Problem 4 [Regression] For a certain region, Stacy the statistician looks at various families over time and considers the income of the parents compared to the income of the (grown) children. Stacy finds a moderate positive correlation between the two incomes. Moreover, Stacy observes that the children of low-income parents make more than their parents, on average, while the children of high-income parents make less than their parents, on average. Stacy's conclusion: "This makes sense. If the parents make a lot of money, there is less pressure and incentive to make as much, so the children do not aim for higher incomes. On the other hand, to make ends meet the children of low-income parents need to find ways to make more money, because they cannot go to their parents for needs or emergencies." Comment briefly on Stacy's conclusion. Is Stacy right? Could there be another explanation?

Explanation / Answer

While stacy could be right in her explanation , however another possible explanation could be that the income of the low income parents would be low(say 25k annual ) and hence on an average their children stand a better chance to earn more than their parents

however , children of high income parents must earn more than thier high income earning parents which might very well earn in excess of 200k annual dollars.

Hence thier average income would definetly be low then the rich or high income parents

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