Question: Consider the savings function sav = beta_0 + beta_1 inc + u, u = squareroot inc c* c where e is a random variable with

Consider the savings function sav = beta_0 + beta_1 inc + u, u = squareroot inc c* c where e is a random variable with E(e)= 0 and var(e) = sigma^2_e. Assume that e is independent of inc Show that E(u|inc) = 0, so that the key zero conditional mean assumption is satisfied. Show that homoscedasticity assumption is violated. In particular, the variance of sav increase with inc. Provide a discussion that supports the assumption that the variance of savings increases with family income

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Consider the savings function sav 5 b01 b1inc1 u, u5 "inc.e, where e is a random variable with E1e25 0 and Var1e2 5 s2 e. Assume that e is independent of inc. (i) Show that E1u0inc2 5 0, so that the...

a) When is an estimator unbiased? Which assumptions do we need to establish unbiasedness of OLS estimates in a simple linear regression context? Explain. [10 Marks] b) What is a Type II error in...

2. (20) Consider the savings function where sav and inc stand for saving and income, e is a random variable with E(e)0 and Var(e- . Assume that e is independent of inc. (a) (5) Show that E(ulinc)-0,...

7 Consider the savings function sav 5 b0 1 b1inc 1 u, u 5 ___ inc e, where e is a random variable with E (e) 5 0 and Var (e) 5 se 2 . Assume that e is independent of inc. (i) Show that E(uuinc) 5 0,...

Considerthe savings function: Sav = Bothinc+ oz = Vinc. Where u is a random variable with F(@) = 0 and var(@) = of. Assume that u is independent of inc. a. Show that E(zinc) = 0, so that the key zero...

(i) Write down the linear program relaxation for the vertex cover problem and solve the linear program. [6 marks] (ii) Based on the solution of the linear program in (b)(i), derive an integer...

I don't know how to solve question d, e and f Exercises: 1. (40 points) Consider a consumer who wants to maximize her lifetime utility. At any point in time the utility she enjoys from at that point...

In this question you will be asked to reflect on a project you have been involved in or observed, in which a design evolved, or could have evolved, through applying a theory of user behaviour. You...

Teuro5 For the year ending December 31, 2021, the Company's income statement is as follows: Revenues $1,093,000 Expenses: Cost Of Goods Sold ($206,000) Administrative Costs ( 152,000) Amortization...

Research Paper: Topic: Why did the traditional financial risk approaches, methods, and tools fail in the financial market meltdown of 2008 - 2009? Discuss questions DQ #1: How has fair value...

The commencement date of the lease is 1 April 20X5 The lease agreement is for a period of four years and requires four lease payments in advance of C110 000. The first payment is due on 1 April 20x5...

2n sin- 3 ) is cos cos + sin 8. The principal value of 3 a) b) 2 c) 3 d) 3 8.a S(x)= cos +/sin log, (x+1) If domain of the function (A) O is [a,b), then a + 2b = 9. (B) 1 (C) 2 (D) 3 9. 10. If x =...

If an employer fals to file an employment tas return on the doe debe, a peraity based on a certain percereage of the amsurk of tax required to be reported may be added to the tax. True Folse

How might a fraud investigation lead to the loss of employees? What are the possible tax implications of fraud against a business? When might a business decide to ignore a fraud committed by an...

6. If you were Jack McKinnon, what would you continue to do, and what should you stop doing?

2. What is the capacity utilization of the Remote Support Unit, and how is this affecting waiting times?

2. Are R&R employees pressured inappropriately by the sales-per-hour system or by management?