Consider the following estimated equation that relates hourly wage to years of e

Question

Consider the following estimated equation that relates hourly wage to years of experience wage-373 + 0.298 exper-0.006 I exper (035) (0.041) (0.0009) n-526, R2 093. Which of the following statements is false? (round your results to the nearest whole number) (a) This estimated equation implies that exper has a diminishing effect on wage. b) The turning-point of equation (2) is approximately 24 years of experience. (c) There is no turning point in equation (2) since this function is always increasing (d) This model is not linear in the parameters, so it cannot be estimated with OLS. (e) Both (c) and (d)

Explanation / Answer

We see as the coefficient of the independent variable exper is positive, while that of exper2is negative, this means that there has to be a turning point for the effect of the independent variable on the dependent variable Wage.

Now the turning point here is computed by differentiating the given equation with respect to the variable exper and then equating it to 0. This is done as:

0.298 - 2*0.0061 exper = 0

exper* = 24 years

Therefore b) is not false.

Statement (c) is clearly false as we are able to find the turning point of 24 years and it is not strictly increasing.

Also the given equation is linear in parameters ( it is not linear in variables ) Therefore OLS could be still used to estimate the coefficients. So statement (d) is also false.

Therefore (e) Both (c) and (d) is the correct answer here.

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