2. A recent study of the salaries of elementary school teachers in a small school district in Northern California came up with the following estimated equation (Note: t-scores in parentheses!): InSAL; = 10.5 -0.006EMP: + 0.002UNITS; + 0.079LANG; + 0.020EXP (-0.98) (2.39) (2.08) (4.97) R2 = .866 N = 25 (8.21) where: SAL the salary of the ith teacher (in dollars) EMP = the years that the ith teacher has worked in this school district UNITS; = the units of graduate work completed by the ith teacher LANG; = a dummy variable equal to 1 if the ith teacher speaks two languages EXP = the total years of teaching experience of the ith teacher a. Make up and test appropriate hypotheses for the coefficients of this equation at the 5-percent level. b. What is the functional form of this equation? Does it seem appro- priate? Explain. c. What econometric problems (out of irrelevant variables, omitted variables, and multicollinearity) does this equation appear to have? Explain. d. Suppose that you now are told that the simple correlation coef- ficient between EMP and EXP is .89 and that the VIFs for EMP and EXP are both just barely over 5. Does this change your answer to part c above? How? e. What remedy for the problem you identify in part d do you recom- mend? Explain. f. If you drop EMP from the equation, the estimated equation be- comes Equation 8.22. Use our four specification criteria to decide whether you prefer Equation 8.21 or Equation 8.22. Which do you like better? Why? InSAL; = 10.5 + 0.002 UNITS; + 0.081LANG; + 0.015EXP (8.22) (2.47) (2.09) (8.65) R2 = .871 N = 25 2. A recent study of the salaries of elementary school teachers in a small school district in Northern California came up with the following estimated equation (Note: t-scores in parentheses!): InSAL; = 10.5 -0.006EMP: + 0.002UNITS; + 0.079LANG; + 0.020EXP (-0.98) (2.39) (2.08) (4.97) R2 = .866 N = 25 (8.21) where: SAL the salary of the ith teacher (in dollars) EMP = the years that the ith teacher has worked in this school district UNITS; = the units of graduate work completed by the ith teacher LANG; = a dummy variable equal to 1 if the ith teacher speaks two languages EXP = the total years of teaching experience of the ith teacher a. Make up and test appropriate hypotheses for the coefficients of this equation at the 5-percent level. b. What is the functional form of this equation? Does it seem appro- priate? Explain. c. What econometric problems (out of irrelevant variables, omitted variables, and multicollinearity) does this equation appear to have? Explain. d. Suppose that you now are told that the simple correlation coef- ficient between EMP and EXP is .89 and that the VIFs for EMP and EXP are both just barely over 5. Does this change your answer to part c above? How? e. What remedy for the problem you identify in part d do you recom- mend? Explain. f. If you drop EMP from the equation, the estimated equation be- comes Equation 8.22. Use our four specification criteria to decide whether you prefer Equation 8.21 or Equation 8.22. Which do you like better? Why? InSAL; = 10.5 + 0.002 UNITS; + 0.081LANG; + 0.015EXP (8.22) (2.47) (2.09) (8.65) R2 = .871 N = 25