Consider the following estimated regression equation (standard errors in parenth

Question

Consider the following estimated regression equation (standard errors in parenthesis) for a sample of 900 individuals with loans in banks: ln L_i = 3.160 + 0.592 ln Inc_i (0.024) Where, ln L_i is the log of the size of the loan held by individual i and ln Inc_i, is the log of the individual's annual income level. Interpret the coefficient on ln Inc_i, and comment on its statistical significance. Explain what is meant by the 'omitted variable problem' in the context of this simple regression model.

Explanation / Answer

with a unit increase in log income, there is 0.592 units increase in log of size of loan.

ho: betai = 0. beta_i is not significant. v/s

h1: betai =/= 0. beta_i is significant.

t = beta/SE_beta = .592/024 = 24.667

p-value = =T.DIST.2T(24.6667,900-2) =0.000.

with p-value < 0.05 (alpha), i reject ho and conclude that betai =/= 0. beta_i is significant.

omitted variable problem occurs when a model created incorrectly leaves out one or more important factors.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.