Question 2 (20 marks) You have data on the working hours of a sample of working wives of employed husbands and run the following regression by Ordinary Least Squares. After tax wage is the marginal hourly wage net of taxes. Other household income consists mainly of husbands' earnings but may also include income from other sources. Dependent variable: Hours of work Coefficient T statistic Intercept 32.06 7.1 After tax wage 10.71 4.9 After tax wage squared -0.36 2.4 Other household income -0.26 3.2 Number of children -5.28 1.7 N=500 R2=0.42 Descriptive statistics

7 Mean min max After tax wage 4 2.5 12 Other household income 250 100 1400 Number of children 2.2 0 4 1. Is the estimated labour supply curve backward bending, forward bending or neither? Assess the statistical strength of the evidence for your conclusion. 2. Derive a formula for the wage at which a wife would be predicted to choose to work the maximum number of hours? Does this wage depend upon other household income or upon number of children? What is this wage for a wife with mean values of other characteristics, given your estimated equation? 3. The government is considering a change from independent to joint taxation. The consequence would be a rise in marginal tax rates on working spouses. What would you expect to happen to women's hours of work in your sample? 4. Are there any ways in which other household income might be affected by the wife's chosen hours of work? Would this cause you to worry about your estimates?