The following model allows the return to education to depend upon the total amou
ID: 3176487 • Letter: T
Question
The following model allows the return to education to depend upon the total amount of both parents' education, called pareduc. log(wage)= beta_beta_1educ+beta2educ.pareduc+beta33exper+betaftenure+mu, Show that, in decimal form, the return to another year of education in this model is Delta log (wage/Delta educe =/3i+beta2pareduc. What sign do you expect for beta2? Why? Using a sample data, the estimated equation from a. is log(wage)_har=5.65+. 047 educe +. 00078educ.pareduc+. 019exper+. 010tenure (.13) (.010) (.00021) (.004) (.003) n=722, R^2=.169. Interpret the coefficient on the interactive term. It might help to choose two specific values for pareduc - for example, pareduc =32 if both parents have a college education, or pareduc =24 if both parents have a high school education- and to compare the estimated return to educ.Explanation / Answer
The Model is
log(wage) = 0 + 1educ + 2educ.paraeduc + 3exper + 4tenure +
By differentiating it by educ or taking marginal derivative
log(wage)/educ = (0)/educ + (1educ)/educ + (2educ.paraeduc)/ educ +(3exper + 4tenure + )/educ
= as all other terms are not varying with "educ" so they will not change and their terms will be 0, so
log(wage)/educ = 1 + 2paraeduc
We wil expect positive sign for 2 because increase in self education with parents education will boost wages of a person, significantly.
b. The given model is
log(wage) = 5.65+0.047educ + 0.00078 educ.paraeduc + 0.019.exper + 0.010.tenure
Here n = 722 and R2 = 0.169
Here, we can see that coefficient of correlation is not that much strong.it has very weak relationship.
Here there are 2 values of paraeduc = 24 and 32 for high school and collecge education respectively
so we can see that by putting 24 and 32 in the model
difference between wages
log(wage)32 - log(wage)24 = 0.00078*(32-24) = 0.00624
(wage)32/(wage)24 = 1.0144
so it will increase wages around 1.44% when parents are college graduated instead of high school educated.
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