II. Suppose that the true consumption function for a certain district Y; = Bo + B1X1 + B2X2 + B3X3 + Ui. Where Y= total

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Ii Suppose That The True Consumption Function For A Certain District Y Bo B1x1 B2x2 B3x3 Ui Where Y Total 1 (34.66 KiB) Viewed 29 times

II. Suppose that the true consumption function for a certain district Y; = Bo + B1X1 + B2X2 + B3X3 + Ui. Where Y= total consumption; X;: income of rural areas; X2: income of urban areas; Xz: income tax You establish that, a priori, the marginal propensity to consume is equally distributed between the urban and rural areas. How would you use the a priori information to estimate this model to avoid the problem of multicollinearity between X and X2 [3 marks).