An international company is worried that employees in a certain job at its headquarter in Country A are not being given raises at the same rate as employees in the same job at its headquarter in Country B. Using a random sample of employees from each country, a regression model is fit with:

Y = employee salary X1 = length of time employee has worked for the company X2 = 1 if employee is in Country A, and 0 if employee is in Country B.

New employees, who have X1 = 0, all start at the same salary, so the company is not interested in fitting a model with different intercepts, only with different slopes.

1) (2.5%) Write the full and reduced models for determining whether or not the slopes are different for employees in the two countries, using the variable definitions above and standard notation. 2) (2.5%)Why the two models have different slopes while the intercepts are the same? 3) (2.5%) What is the null hypothesis testing whether the slopes are different in the full and the reduced models? How do you plan to carry out a test of the null hypothesis?

4) (2.5%) Draw a picture showing the two different lines for the two headquarters. 5) (5%) Suppose we suspect that for the two headquarters, the regressions may have different intercepts and slopes at the same time. In this case, how are your answers to the above questions 1), 2), 3) and 4) differ. Note, for 3) above, this time we are testing that the two headquarters have the same intercept and same slope. Provide sufficient discussions to illustrate your conclusions.

Assume an economy is trying to allocate 40 units of a non- renewable resource across two time periods. The following information is provided:

MWP = 16 - 0.5Q

MC = $1 per unit

(A).Given the discount rate is 10%, what are the efficient level of prices and quantities at each period? [5 points]

(B).Calculate the marginal user cost for both periods. [5 points]

(C).Diagrammatically show the solution to this problem. [Hint: draw the marginal net benefits curve for each period on the same diagram] [5 points]

(D).What is the approximate NPV of a stream of money($3,000, $ 5,000, $ 6,000, $ 10,000 & $ 12,000) paid in the next five years when the interest rate is 6%? Show your work.[5 points]