Consider The Saving Function Savi Bo Biinc Hig Ui Vinci Xei 1 Where Sav Is Saving Inc Is Income Ej Is A Rand 1 (30.08 KiB) Viewed 18 times
Consider the saving function, SaVi Bo + BiinC; + Hig Ui Vinci xei (1) where sav; is saving, inc; is income, Ej is a random variable with E(ei) = 0 and var(ei) = 02, where o is a constant. Assume that E¡ is independent of inci.
f) (2 points) Someone suggests transforming the regression by dividing Jinc; on both sides: SOV; Vinc Bo 1 Vinci + Bilinc; +Ei (2) savi That is, run a regression of on Jinci and Jinc;. Show that OLS Assumption 1 is also (el = 0 satisfied in this equation, i.e., Vinc g) (4 points) You can run a regression either based on equation (1) or equation (2), which one do you prefer? Why? You only need to provide an intuitive answer.
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