Suppose you estimate an earnings function $($ln $($wagei$)=$ $0+$ $1$edui $+$ ui

$)$ to

examine the relationship between hourly wage rate $($wage$)$ and years of schooling $($edu$)$ as

follows $($standard errors are in parentheses$).$

ln$$wagei $=0\mathrm{.}60+0\mathrm{.}10$edui

$(0\mathrm{.}10)(0\mathrm{.}008)$

R

$2=0\mathrm{.}186,$ n $=62.$

$($i$)(10$ points$)$ Interpret the estimated parameters, $$

$0,$ $$

$1$ and R

$2$

$.$

$($ii$)(10$ points$)$ What is your expectation regarding the relationship between education

and earnings? Using a $5\%$ significance level, test your hypothesis $($carefully state the

null and the alternative hypotheses$).$

$($iii$)(5$ points$)$ Is this relationship causal? Justify your answer.