Question: Considerthe savings function: Sav = Bothinc+ oz = Vinc. Where u is a random variable with F(@) = 0 and var(@) = of. Assume that

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 conditional mean assumption is satisfied. (Hint: If u is independent of ing, then F(uline) = E(w)) b. Show that var(gling) = oging, so that the homoscedasticity assumption is violated. In particular, the variance of sav increases with inc. (Hint vor(uline) = vor(@ ) since u is independent of inc. C. 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
Get step-by-step solutions from verified subject matter experts
