Question

In examining the determinants of income, data were collected regarding the characteristics of 45 adults, and the regression Y = β1 + β2S + β3D + β3 (S*D )+ u was used, where Y is the annual income (in thousands of dollars), S is his/her years of education, and D is a dummy variable = 1 if the adult is female. If you get = 26.3 + 2.94S - 0.76D + 0.10(S ∙ D) when you run the regression, which of the following is true?

A. The marginal effect of an extra year of schooling for men is $2940.

B. A woman with 20 years of schooling will earn $2760 less than a man with the same amount of schooling.

C. The marginal effect of an an extra year of schooling for women is $304.

D. All of these are correct.

Answer 1

The answer is:

Calculations

We have been provided the following regression equation:

Y is the annual income (in thousands of dollars), S is his/her years of education, and D is a dummy variable = 1 if the adult is female.

When Male, then D=0

Hence the marginal effect is 2.94*1000=2940

When Female, D=1

.

Therefore the marginal effect is 3.04*1000=3040 and not 304.

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