Question

Consider two men, both of whom are 35 years of age. Suppose the first has four more years of schooling than the second and therefore has four fewer years of working experience. Based on the model, Y = - 6.179 + 0.978 X₁ + 0.124 X₂ + e, where Y = earnings, X₁ = education, and
X₂ = experience, who has the greater predicted earnings and by how much? Show your calculations.

Answer 1

Coefficient of X1 (education) is higher than coefficient of X2 (experience). Therefore, for the first person, 1 unit increase in X1 and a simultaneous 1 unit decrease in X2 will lead to a net increase in Y equal to (0.978 - 0.124) = 0.854 units.

As a result, the first person will earn 0.854 units higher than the second person.

Therefore, 4 unit increase in X1 and a simultaneous 4 unit decrease in X2 will lead to a net increase in Y equal to (0.854 x 4) = 3.416 units.

As a result, the first person will earn 3.416 units higher than the second person.