The Director of Economic Development in Potto Gulch, Wisconsin, is interested in studying the relationship between business activity and spending on social welfare programs. Specifically, she hypothesizes that as business activity increases the boost to the local economy (mainly through job creation) should result in lower spending on programs for the poor. To test this hypothesis, the director gathers annual data for the last 11 years on three variables. The dependent variable is annual spending on social welfare programs (in millions of dollars). The director feels that the number of business permits issued each year is a good indicator of economic activity and selects this as the first independent variable (BPRMT). The second independent variable is the number of residents in Potto Gulch (POP). The regression output is displayed below.
(a) Interpret the slopes and intercept for this model. What substantive conclusion can the director make about the relationship between business activity and spending on social welfare programs?
(b) The director is concerned about the drop in the explanatory power of the model indicated by the adjusted R2 value. What is probably the reason why the adjusted R2 is lower than R2?
(c) The director has located data on the actual number of Potto Gulch citizens receiving social welfare assistance each year. If the director includes this new variable in the model, which of the current independent variables should be removed from the model? Explain.

  • CreatedNovember 11, 2015
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