9) A subsample from the Current Population Survey is taken on weekly earnings of

Question

9) A subsample from the Current Population Survey is taken on weekly earnings of individuals, their age, and their gender. You have read in the news that women make 70 cents for every $1 that men earn. To examine this hypothesis, you first regress weeklyearnings on a constant and a binary variable Femalc, which takes on a value of 1 for females and 0 otherwise. The results are: Earn = 57070-170.72 . Female, R2-0084, RMSE 282.12 (a) There are 850 females in your sample and 894 males. What are the mean earnings of males and females in 2b) A classmate argues that you should control for education. He breaks education into 3 mutually exclusive and exhaustive categories: high school dropout, high school graduate, and at least one year of college. He says yoiabc vou should add three dummy variables into the model, one for each category, Is this good advice? Explain. You decide to control for age (in years) in your regression results because you hypot t older earn more on average than younger people, but at a decreasing rate as they age. This regression output is as follows: 135 Ear 323.70-169.78 Female 15.15 Age 021 Age2, R2 0135, RMSE 2744s dwt to preeict Aius What youcbserve (c) Interpret the two measures of fit. Thevove female make per year in your sample compared (d) How much more, on werage, does to a 25 year old femaleem . (e) Assuming homoskedasticity, test whether Age and Age2 are jointly significant at the 5% level R2-0.5 serz 20.99 slope dosnrt Change, (ntercept'a'rt chong

Explanation / Answer

9.(d) The revised equation for earnings is:

Earn = 323.70 - 169.78 x Female + 15.15 x Age - 0.021 x Age2

For a 30-year old female, the earning = 323.70 - 169.78 + 15.15 x 30 -0.021 x 302 = 589.52

For a 25-year old female, average earning = 323.70 - 169.78 + 15.15 x 25 -0.021 x 252 = 519.545

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