Question 1.

We have a simple linear regression Model, which estimates the effect of training on
Wage level as follows:

wage=β 0 + β 1 training+u

Explain the factors that can be included in u. Why do we assume that the expectation of the error
term is 0? Is it a strong assumption? Do you expect a correlation between training and u? Why and
why not?

Question 2. Consider the following Regression results.

a) Interpret the coefficients of this regression.

b) Which variables are significant at a 10% significance level? Formulate Null and Alternative
hypotheses for each variable.

c) Write the estimated equation based on the information given in the above. What is a
change in the estimated value of the mpg variable if ln_price decreases by 10%?

d) Calculate and Interpret the R2. Can this model be used to predict mpg level?

3. Consider the following model.

Average Grade=55+0.56∗Number of Hours+20∗Capital−15∗Male +u

Calculate the predicted average grade for the following cases. (Male and Capital is dummy
variables)
a) Number of Hours=10, person studies in a small city and he is Male
b) Number of Hours=12, student studies in the capital and she is female
c) Number of hours, student studies in the capital and he is male
d) Number of Hours=9, student studies in a small city and she is female
Interpret the coefficients of each variable.