Suppose you estimate the consumption function Y i = 1 + 2 X i +

Question:

Suppose you estimate the consumption function

Y_i = α₁ + α₂X_i + u_1i

and the savings function

Z_i = β₁ + β₂X_i + u_2i

where Y = consumption, Z = savings, X = income, and X = Y + Z, that is, income is equal to consumption plus savings.

a. What is the relationship, if any, between α₂ and β₂? Show your calculations.

b. Will the residual sum of squares, RSS, be the same for the two models? Explain.

c. Can you compare the R² terms of the two models? Why or why not?

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Basic Econometrics

ISBN: 978-0073375779

5th edition

Authors: Damodar N. Gujrati, Dawn C. Porter

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Question Posted: Apr 30, 2018 03:51 AM

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Suppose you estimate the consumption function Y i = 1 + 2 X i +

Question:

Step by Step Answer:

a Using OLS we obtain That is the slope in the regression of sa...View the full answer

Basic Econometrics

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