The consumption function, developed by John Maynard Keynes, captures one of the key relationships in economics. It expresses consumption as a function of disposable income, where disposable income is defined as income after taxes. The accompanying table shows a portion of average U.S. annual consumption and disposable income for the years 1985-2006.

Data for Case Study 20.3 Consumption and Disposable Income, 1985-2006

Year.............. Consumption..................Disposable Income

1985................... $23,490................................ $22,887

1986................... 23,866.................................. 23,172

⋮................... ........... ⋮........................................... ⋮

2006................... 48,398................................ . 58,101

In a report, use the sample information to:

1. Estimate and interpret the model: Consumption = β0 + β1 Disposable Income + ε.

2. Indicate which assumption might be violated, given that the analysis uses time series data.

3. Use the runs test to determine whether the pattern of the residuals is nonrandom at the 5% significance level.