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BOOK: A Practical Guide to Using Econmetrics By A.H. Studenmund

3. Consider again the regression output in Exercise 5, Chapter 7 you completed in \#2. Which of the regional dummies are statistically significant at the 5% significance level? Explain. ( 6 points) 5. In an effort to explain regional wage differentials, you collect wage data from 7,338 unskilled workers, divide the country into four regions (Nontheast, South. Midwest, and West), and estimate the following equation (standard errors in parentheses): Y^i=4.780.038Ei0.041Si0.048Wi(0.019)(0.010)(0.012)R^2=.49N=7,338 where: Yi= the hourly wage (in dollars) of the th unskilled worher E1 : = a dummy variable equal to 1 if the ith worker fives in the Northeast, 0 otherwise S1= a dummy variable equal to 1 if the ith worker lives in the South, 0 atherwise W3= a dummy variable equal to 1 if the ith worker lives in the West, 0 otherwise a. What is the omitted condition in this equation? b. If you add a dummy variable for the omitted condition to the equation without dropping EjSj or Wi, what will happen? c. If you add a dummy variable for the omitted condition to the equation and drop fi, what will the sign of the new variable's estimated coefficient be? d. Which of the following three statements is most correct? Least correcte Explain your answers. i. The equation explains 49 percent of the variation of Y around its mean with regional variables alone, so thene must be quite a bit of wage variation by region. ii. The coefficients of the regional variables are virually identical, so there must not be much wage variation by region. iii. The coefficients of the regional variables are quite small compared with the average wage, so there must not be much wage variation by region