It has been claimed that an extra year of experience increases wage by \(0.8 \%\) and that an extra year of education is worth 14 extra years of experience. Doing the calculation, this would mean an extra year of education increases wage by \(11.2 \%\). We will investigate this hypothesis using data in the file cps5_small. Only those observations for which years of education exceeds 7 will be used. Perform all tests at a \(5 \%\) level of significance.

a. Estimate the model \(\ln (W A G E)=\beta_{1}+\beta_{2} E D U C+\beta_{3} E X P E R+e\) and jointly test the claims about the marginal effects of EDUC and EXPER.

b. Use RESET to test the adequacy of the model; perform the test with the squares of the predictions and the squares and cubes of the predictions.

c. After estimating the model

jointly test the claims about the marginal effects of EDUC and EXPER at the following levels of \(E D U C\) and EXPER:

i. \(E D U C=10, E X P E R=5\)

ii. \(E D U C=14, E X P E R=24\)

iii. \(E D U C=18, E X P E R=40\)

d. Use RESET to test the adequacy of the model; perform the test with the squares of the predictions and the squares and cubes of the predictions.

e. How would you respond to the claim about the marginal effects of EDUC and EXPER?

Transcribed Image Text:

In(WAGE) = B + BEDUC + BEXPER+B4EDUC + B,EXPER + B6(EDUC EXPER) + e