Chapter 2: The Simple Linear Regression

2.1. The definition of simple linear regression (SLR) model

2.2. The method of Ordinary Least Square (OLS)

2.3. Interpretation of the SLR model

2.4. Properties of the OLS estimator

2.5. Unit of measurement and functional form

2.6. Assumptions of the OLS estimator

2.7. Mean and variances of the OLS estimator

2.1. The definition of simple linear regression model

Econometrics is based on techniques such as regression

analysis and hypothesis testing.

What is regression analysis?

“Regression analysis is concerned with the study of the dependence of one variable, the dependent

variable, on one or more other variables, the explanatory variables, with a view to estimating and/or
predicting the (population) mean or average value of the former in terms of the known or fixed (in
repeated sampling) values of the latter” [2, p.18].

-Regression studies the dependence of one variable (the dependent variable) on

other variables (the explanatory or independent variables).

-The goal of regression analysis is to estimate or predict the population mean of

one variable on the basis of the known or fixed values of the other variables.
Simple linear regression (SLR) is a linear regression model with a
single explanatory variable
(Cont)

The slope parameter ( ) shows how much changes if increases by one-

unit. But this interpretation is only correct if all other factors are constant ( ).

Intercept parameter or constant term

Dependent variable,
explained variable, Independent variable, Error term
response variable, explanatory variable, unobservables,
predicted variable, control variable, disturbance,
regressand… pridictor white noise,..
regressor,…
Simple linear regression: graphical presentation of the coefficients
(Cont)

Constant slope indicates that a one-unit change in X has the same effect
on Y regardless of X's innial values.
Simple linear regression: (Cont)

Sunlight, rainfall, moisture

Quantify the effect of fertilizer on diseases, soil fertility,...
output, holding all other factors constant

Work experience, ethnicity, gender, ability,...

Measures the change in wage

given an addtional year of formal schooling,
holding all other factors fixed
2.2. The method of Ordinary Least Square (OLS)
The population linear regresson model (PRM):

We have the population linear regression model (PRM):

 and are two variables that describe the properties of the population under
consideration: is explained by .

, representing
all other unobserved factors
than 𝑋 that affect Y.

𝟎, 𝟏

The goal of the linear regression is to estimate the population mean of the
dependent variable on the basis of the known values of the independent
variable(s).
To estimate which is known as the conditional expectation function or
the population linear regression function.
The conditional mean: E )
(Cont)
The conditional mean: E )
(Cont)

Distribution of wages given

education=the college level
 The population linear regression function (PRF):
E )=
(Cont)
Under some certain assumptions, we can capture a ceteris paribus relationship
between and

 -Linear in parameters and

 The average value of does
not depend on the value of and equals zero.

-This assumption implies that and

E ) =
E ) =
E ) = 𝟎 𝟏
(Cont)
This assumption means that: repespents other unobservable factors does not
have a systematical effect on . Why? This assumption is critical for causal analysis; it cannot
be tested statistically and has to be argued by economic
theory.

𝑢 = The observed value − Mean

Note that 𝒙𝟏, 𝒙𝟐, , 𝒙𝟑, …here refer to 𝒙𝒊, and not different variables
(Cont)
E )= : This assumption is a strong assumption for cetetis paribus analysis;
it cannot be tested statistically and has to be argued by economic theory.

: ability

To capture the ceteris paribus relationship between wage and education, we

have to assume that the average ability is the same for all levels of education.
E.g. E )=… E )… =E )=…
E )=… E )=0.
𝟎 𝟏

Note: : the assumption for defining the intercept, 𝟎

E )= : the assumption with impact, 𝟏

?
(Cont)
: land quality

To capture the ceteris paribus relationship between

and , we have to assume that the average quality of
land is independent of the amount of fertilizer.
In other words: E ) = the amount of fertilizer is
applied independently of other plot characteristics (e.g. land quality)

𝟎 𝟏

?
 𝑇ℎ𝑒 𝑎𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑠
: sample linear regression function

𝐵𝑦 𝑗𝑜𝑖𝑛𝑖𝑛𝑔 𝑎𝑙𝑙 𝑐𝑜𝑛𝑡𝑖𝑜𝑛𝑎𝑙 𝑚𝑒𝑎𝑛 𝑣𝑎𝑙𝑢𝑒𝑠 𝒇𝒊𝒕𝒕𝒆𝒅 𝒗𝒂𝒍𝒖𝒆𝒔

𝑤𝑒 𝑜𝑏𝑡𝑎𝑖𝑛 𝑡𝒉𝒆 𝒓𝒆𝒈𝒓𝒆𝒔𝒔𝒊𝒐𝒏 𝒍𝒊𝒏𝒆

The average income for all household heads with 12 years of education is E(Income|edu=12)=815+53*12=1451

Note: But it is false to interpret that evevery household head with 12 years of education will earn 1451
The sample linear regression function (SRF)
(Cont)
is called as “Y-hat” or “Y-cap”,

𝒊 is the estimator of , which also means the fitted or predicted value of 𝒊

𝟎 is the estimator of

𝟏 is the estimator of
is the estimator of , which is also known as the residual 𝒊 = 𝒊- 𝒊

𝒊
Population Sample
Model

Population linear regression model (PRM) Sample linear regression model (SRM)

Function E )=
Population linear regression function (PRF) Sample linear regression function (SRF)
What is OLS?
Answer:
𝒏 𝟐
𝟎 𝟏 𝒊 𝟏 𝒊
(Cont)
Deriving the OLS estimators
(Cont)

denote a random sample size n from

the population
Let are possible values of the population parameters

From the sample, we have to find to minimize the

(the residual sum of squares)

Take partial derivatives of RSS with respect to .

Set each of the partial derivatives to zero
Solve for { } and replace them with the solutions
are chosen to make the residuals add up to zero
OLS estimators
(Cont)

= =
These sample functions are the OLS estimators for

For a given sample, the numerical values of are

called the OLS estimates for
We have derived the formula for calculating the OLS estimates of our
parameters, but you don’t have to compute them by hand.

Regressions in Stata are very easy and simple, to run the regression of y on x,
just type: reg y x
Estimators vs estimate
 An estimator, also referred to as a "sample" statistic, is a
rule, formula, or procedure that explains how to estimate
the population parameter from the sample data.
 An estimate is a specific numerical value generated by the
estimator in an application.

Estimator: ,

Estimate: 815, 53
How do we fit the regression line 𝒊 𝟎 𝟏 𝒊 to the data?
Answer:
(Cont)

𝒊
𝒊 >1328

= 𝒓𝒆𝒔𝒊𝒅𝒖𝒂𝒍= 𝒊 - 𝒊

𝒊 𝒊
𝒊
𝒊 <1328
 ReDifference Between the Residual and the Error
The
2.3. Interpretation

: the slope=
: the constant or
which indicates the average amount
intercept, which shows by which changes when increases by one
the average value of the unit, holding other factors in the model
dependent variable when constant.
the independent variable
is set to zero.
>0: a possitie association between and
<0: a negative association between and
=0: no association between and
Meat consumption and income in Lao Cai
(Cont) Monthly meat consumption per
household (1000 VND)
Monthly household income per
capita (1000 VND)

Fitted regression:

The slope estimate of 0.161 means that a

𝟎: The intercept (constant) 𝟏

of 299 means that a household's meat consumption would increase by

household with zero income 0.161 thousand VND if their per capita income
has a predicted meat increased by one thousand VND.
consumption of 299
thousand VND. What is the average meat consumption for households with
a monthly income per capita of one million VND?
Wage and education among workers in FDI enterprises in Hanoi, 2018
(Cont) Monthly wage (1000 VND) Years of education

Fitted regression:

The slope estimate of 754 means that

𝟎:The intercept (constant) the average predited wage for all workers
of -856 means that all with 12 years of education is -856+(754
workers without education *12)=8192 thousand VND/month (about 8.2
has a predicted wage of -856 million VND)
thousand VND/month.
On average, each additional year of
Is this meaningful? education would increase wage by
754*1=754 thousand VND/month.

The result should not be interpreted as a causal effect.

Intercept often does not make sense to interpret
(Cont)

𝟎 : The intercept NOTE

(constant) of -856 means
the intercept or constant often has no real
that all workers without
education has a predicted meaning for some reasons:
wage of -856 thousand
 Zero settings for all independent variables are often
VND/month.
impossible or irrational. (e.g., can we set a
Is this meaningful? household's food consumption to zero?).

 The intercept might be outside of the observed data

E( )=0
(e.g., no worker without education).

 Estimating the intercept is done to make sure that the

residual mean is equal to zero, which makes the
intercept meaningless.
 The intercept is outside of the data range
(Cont)

The intercept = - 856 when setting the independent variable (education) to zero ( zero years of
education).

But the data shows that education has the smallest value of 6 (6 years of education).

Therefore, we can’t interpret the intercept because it is outside of the data range.
The intercept = - 856 when setting the independent variable (education) to zero ( zero years of
education).

But the data shows that education has the smallest value of 6 (6 years of education).

Therefore, we can’t interpret the intercept because it is outside the range of the study data.
 InThe intercept absorbs the bias for the regression model.
𝟎
(Cont)

The omission of some relevant variables in the model.

e.g., some other factors than education, such as work experience or ability, can affect wage.

This omission can cause the bias:

e.g., the residuals may have an overall positive or negative mean

The intercept prevents this bias by compelling the

residual mean to equal zero: .

It is crucial to include the intercept in the regression

model.
 𝟎 The intercept absorbs the bias for the regression model.
The regression model can always be redefined with the same slope but a new intercept and error, where the
new error has a zero mean: 𝐸 𝑢 = 0

(Cont)

𝐸 𝑢 <0

𝐸 𝑢 =0

𝜷𝒂

𝜷𝒃
𝐸 𝑢 >0
 2.5. Properties of the OLS estim2.5.
2.4. Properties
Properties of OLS
of the the OLS estimator: fitted values and residuals
estimator
ator =3560.667+0.143*3000=785.42

- : Residuals )
: Predicted
Obs
1 3000 995 785.423017 209.577
2 8208 2900 1530.78546 1369.215
3 3613 1450 873.15481 576.8452
4 4624 1460 1017.84787 442.1521
5 4751 510 1036.02395 -526.024
6 5151 760 1093.27145 -333.271
7 5884 1005 1198.17749 -193.177
8 2696 100 741.914917 -641.915
9 2485 912 711.716861 200.2831
10 8860 570 1624.09889 -1054.1
11 1436 512 561.585292 -49.5853
Fitted values and residuals

(Cont)
 Thealgebraic
Some Simple properties of OLS
(Cont)
Regression Model
From the first order conditions of OLS, we have some algebraic properties of OLS:
 The sum and mean of the residuals will aways equal zero

 The residuals will be uncorrelated with the independent variable

or
 The residuals will be uncorrelated with the fitted or predicted values

 Sample averages of y and x lie on regression line

 The average of the predicted values is equal to the average of actual values .
=
Some algebraic properties of OLS
(Cont)
Observation X Y Predicted Y: Residuals:

1 3000 995 785.423017 209.576983

2 8208 2900 1530.78546 1369.214536

3 3613 1450 873.15481 576.845190

4 4624 1460 1017.84787 442.152134

5 4751 510 1036.02395 -526.023947

6 5151 760 1093.27145 -333.271447

7 5884 1005 1198.17749 -193.177490

8 2696 100 741.914917 -641.914917

9 2485 912 711.716861 200.283139

10 8860 570 1624.09889 -1054.098889

11 1436 512 561.585292 -49.585292

Mean 𝑌=1015.818 𝑌=1015.81818 𝐸 𝑢 =0.00000000

Sum ∑ 𝑢 =0.00000000
Cov( , ) =0.0000

Cov( , ) =0.00000
 Decomposition of total variation
TSS ESS RSS
(Y- )
1015.818182 995 785.4230167 433.3966942 53081.93213 209.576983 43922.51
1015.818182 2900 1530.785464 3550141.124 265191.3019 1369.214536 1874748
1015.818182 1450 873.1548101 188513.8512 20352.83762 576.845190 332750.4
1015.818182 1460 1017.847866 197297.4876 4.119617482 442.152134 195498.5
1015.818182 510 1036.023947 255852.0331 408.2729503 -526.023947 276701.2
1015.818182 760 1093.271447 65442.94215 5999.008273 -333.271447 111069.9
1015.818182 1005 1198.17749 117.0330579 33254.91739 -193.177490 37317.54
1015.818182 100 741.9149168 838722.9421 75022.99858 -641.914917 412054.8
1015.818182 912 711.7168607 10778.21488 92477.61353 200.283139 40113.34
1015.818182 570 1624.098889 198753.8512 370005.4186 -1054.098889 1111124

1015.818182 512 561.5852924 253832.7603 206327.5178 -49.585292 2458.701

TSS (Total sum of squares) 5559885.636

ESS (Explained sum of squares) 1122125.939

RSS (Residual sum of squares) 4437760

R-Squared=ESS/TSS 0.201825363
Goodness-of-fit measure (R-squared)
Total sum of squares Explained sum of Residual sum of squares
squares

,
where =

TSS represents total variation in the ESS represents variation RSS represents variation not
dependent variable(s)
explained by regression explained by regression

Total variation Explained part Unexplained part

Goodness-of-fit measure:R-squared or the coefficient of determination: measures
the proportion of the total variation in that is explained by the regression.
Graphic presentation for decomposing the total variation
Goodness-of-fit measure (R-squared)

N=265; =0.172 The regression explains 17.2 %

of the total variation in monthly wage

N=11; =0.201
The regression explains 20.2 %
of the total variation in meat consumption

Note: High R-squared doesn't mean it has a causal interpretation.

 2.5. Unit of measurement and functional form
Unit of measurements
Change in the measurement unit of the dependent variable 𝑌 Intercept Slope coefficient
𝟎
Y is divided by the constant 𝐶: 𝟎 𝟏

Y is multiplied by the constant 𝐶: 𝟎 𝟎

wage is measured in 1.000 VND

wage is measured in 1.000.000 VND: Wage/1000

Change in the measurement unit of the in dependent variable 𝐗 Intercept Slope coefficient
𝟎
X is divided by the constant 𝑪: 𝟎

X is multiplied by the constant 𝑪: 𝟎

𝑤𝑎𝑔𝑒 = 608 + 70edu education is measured in years.

𝑤𝑎𝑔𝑒 = 608 + 𝟓. 𝟖𝑒𝑑𝑢 education is measured in months. Edu*12 ( months)
 Functional forms
Cont
𝟎 𝟏
 Each additional year of education has the same effect on wages. Is this
reasonable?
 In fact, the effect may be greater at higher levels of education.

(𝜷𝟎 𝜷𝟏 ) and =0
 Functional forms
(Cont)
 We can model how each year of education increases wages by a constant
percentage.
 From the exponential function: (𝜷𝟎 𝜷𝟏 )
, an approximately
constant percentage change effect can be modeled as:

Percentage change of wage if education increases by one year

( )

( * ) if is very small.
We multiply by 100 to obtain the perentage change given one extra year of education
; =0.15
( *

Important notes:
 Exact = exp( *1)-1= .04456445 =4.45%
 =0.16: shows that educ explains about 16% of the variation in log(wage) (not wage)
Functional form
(Cont)
2.6. Standard assumptions for the simple linear regression model

 Assumption SLR.1 (Linear in parameters)

 Assumption SLR.2 (Random sampling)

 Assumption SLR.3 (Sample variation in the explanatory variable)

 Assumption SLR.4 (Zero conditional mean)

 Assumption SLR.5 (Homoskedasticity)

 Assumption SLR.1 (Linear in parameters)

The relationship between Y and X is linear in parameters.

(1) Linear in both parameters and the variables.

This implies that a one-unit change in X has the same effect on Y regardless of X’s innial values.
is a linear function of and the regression curve is a straight line.

(2) Linear in parameters but non-linear in variables

(3) Linear in variables but non-linear in parameters

From now on, the term “linear regression” means linearity in parameters ( ).
Both regression models are linear in parameters.
(Cont)
English= Math= 𝛽 𝟐 +𝑢
Stata command: curvefit english income, function (1) Stata command: curvefit math income, function (4)

1,000,000 VND/month 1,000,000 VND/month

Assumption SLR.2 (Random sampling)
(Cont)

The data is a random sample drawn

from the population.
It means that every member of the
population has an equal chance of being
selected for the sample.
This assumption is likely to be violated.
Why?
 Assumption SLR.3 (Sample variation in the independent variable): >0

(Cont)

 Sample variation in the independent variable means that

the values of the independent variable are not the
same.
>0

 If the values of the independent variables are identical, it

is impossible to estimate because the denominator=0.
=0
No variation in education: Every employee has the same level of education: 12 years.

(Cont)
Assumption SLR.4 (Zero conditional mean):
(Cont)
We have already discussed about this crucial assumption

 Given any value of the explanatory variable, the expected value of the error
term is zero

 In other words: the value of the independent variable (X) must contain no
information about the mean of the unobservables (u).

 Note: There is no linear or non-linear relationship

between and .
 implies that the explanatory variable is exogenous:
There is no linear association between and .

Questions:
𝑪𝒐𝒗 𝒙, 𝒖 =0 implies that 𝑬 𝒖 𝒙 = 𝟎?
𝑪𝒐𝒗 𝑥, 𝑢 = 𝟎 𝑜𝑟 𝑪𝒐𝒓𝒓(𝑥, 𝑢) =0 does not implies that 𝑬 𝒖 𝒙 = 𝟎
Assumption SLR.5 (Homoskedasticity): V 𝟐

(Cont)

Given any values of the explanatory variable,

the error term has the same variance.
V which is the same as V
In other words: the value of the independent variable (X)
must contain no information about the variance of the
unobservables (u).
E.g.: Even though the average wage goes up with education, the spread of
wages around the mean is assumed to stay the same at all levels of education.
Note: Because heteroskedasticity occurs
whenever V is a function of .
Homoskedasticity vs heteroskedasticity
(Cont)
𝑯𝒐𝒎𝒐𝒔𝒌𝒆𝒅𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 For any value of x, the variance of y is similar. 𝑯𝒆𝒕𝒆𝒓𝒐𝒔𝒌𝒆𝒅𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚: Wage variation around the mean
is unconstant, increasing with education level
Heteroskedasticity before and after logarithm transformation (Cont)

𝑯𝒆𝒕𝒆𝒓𝒐𝒔𝒌𝒆𝒅𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚: Wage variation around the 𝑯𝒐𝒎𝒐𝒔𝒌𝒆𝒅𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚: Variation in log wage around the
mean tends to increase with 𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 𝑙𝑒𝑣𝑒𝑙𝑠 mean is relatively constant across all education leves.
W𝑎𝑔𝑒 = 𝛽 + 𝛽 𝑒𝑑𝑢 𝐿𝑜𝑔_W𝑎𝑔𝑒 = 𝛽 + 𝛽 𝑒𝑑𝑢
Stata command: Stata command:
Reg wage edu gen Log_Wage=ln(wage)
Reg Log_Wage edu
hettest
hettest
Gauss-Markov assumptions of the Simple Linear
Regression (SLR)
Under SLR.1-SLR.4, is unbiased: E( )=
Under SLR.5, 𝑡ℎ𝑒 𝑂𝐿𝑆 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝛽 has the smallest variance among other linear unbiased estimator.
Under SLR.1-SLR.5, 𝑡ℎ𝑒 𝑂𝐿𝑆 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 𝛽 for 𝛽 is the best linear unbiased estimator (BLUE)

1. Assumption SLR.1 (Linear in parameters)

2. Assumption SLR.2 (Random sampling)
3. Assumption SLR.3 (Sample variation in the explanatory variable)
4. Assumption SLR.4 (Zero conditional mean: E(u|x=0))
5. Assumption SLR.5 (Homoskedasticity: Var(u|x= 𝝈𝟐 ))

What happens if any of our four assumptions SLR.1–SLR.4 is not satisfied?

What happens if the assumptions SLR.1–SLR.4 are satisfied but the assumption SLR.5 is not?
 2.7. Mean and variances of the OLS estimator
Interpretation of unbiasedness
 Under SLR.1-SLR.4, is unbiased: E( )=
 Unbiasedness does not imply that, with a given sample, our estimated parameters would
equal the exact true values of the population parameters.
 In a given sample, estimates may larger ( > ; > ) or smaller ( < ; < ) than
the true values.
Instead, the unbiasedness should be interpreted that:

o if sampling is repeated from the same population;

o and the estimation is repeated many times;
o we will get the expected value of the estimated parameters, which will be equal to the true
population parameters.
E(𝛽 )= E(𝛽 )=
 Variances of OLS estimators:
Estimating the variance of the error term:
From a population regression model: + is the error term
we have a sample regression model: . representing all
; , where 𝒊 = the residual. unobservables.

 Estimating the error variance or the variance of the error term: 𝟐

An unbiased estimate of the error variance can be calculated as:

𝟐 , where = the number of independent variables

 Estimating the standard error of the regression:

Note: Under the assumptions 1-5: 𝐸 𝝈𝟐 = 𝝈𝟐 , which is an unbiased estimate of the error variance.
measures the average distance between the observed values and the
regression line (the fitted values).
Estimating the variance of the error term:
𝟐

𝑀𝑒𝑎𝑡 = 𝟑𝟓𝟔 + 𝟎. 𝟏𝟒𝟑 𝑰𝒏𝒄𝒐𝒎𝒆

N=11

𝝈 measures the average distance between the observed values and the regression line (the fitted values).
Estimating the variance of the error term:
(Cont)

We have =4437760, where n=11, k=1 ( )

𝟐 = 4437760/11-2=4437760/9=493084.44

= = 702.19972

indicates that the average difference between observed and fitted

meat consumption values is about 702 thousand VND.

Note:
 The standard error of the regression ( ) has the same unit as the
dependent variable.

 also has other names: the standard error of the estimate and the root
mean squared error (Root MSE).
Variances and standard errors for regression coefficients
; ;
𝝈𝟐 = ∑ 𝑢
(Cont)

Variance and standard error for the slope coefficient 𝟏

∑ ̅)
;
(
∑ ( ̅)

Variance and standard error for the intercept coefficient 𝟎

∑
∑ ̅)
;
(
∑ ( ̅)

Note:

 Standard errors are the estimated standard deviations of the regression coefficients.

 They measure how precisely the coefficients are estimated.

Properties of the mean and variances

E( )=

True
Properties of the mean and variances
 Exercise:
1. Is the residual the error term? Explain
2. Why do the sum and mean of the residual always equal zero?
3. What happens to the sum and mean of the residual if we exclude the
intercept from the OLS model?
4. What happens to the OLS estimator if the sample is not randomly selected
from a population?
5. What happens to a simple linear regression model if the value of the
explanatory variable is similar for all observations?
6. Suppose our model satisfies SLR assumptions 1–4 but suffers from
heterokedasticity. In this case, are our estimates biased?. What is the
consequence of the heterokedasticity?
7. Comment on the statement that a model with a high R-squared shows a
strongly causal relationship.
8. Which model violates the assumption of the OLS?
+ ; (1)
+ ; (2)
+ (3)
 Excercise
9. Let Qd denote the quantity of a given product, and let P denote the price of that product. A simple
model is presented that connects quantity demanded to price: 𝑄𝑑 = 𝛽 + 𝛽 𝑃 + 𝑢
(i) What possible factors are contained in 𝑢? Is it likely that these will be related to price
(ii) Will a simple regression analysis show the ceteris paribus effect of price on quantity demanded? Explain.

10. The following table contains monthly meat consumption per household (thousand VND) and monthly household
income per capita (thousand VND) for
list 20 households.
meat income list meat income
1 1390 5031 11 1770 4365
2 1320 6491 12 1620 4727
3 2900 4900 13 1460 5067
4 790 3267 14 650 5094
5 1600 5164 15 995 3000
6 2400 3260 16 2900 8208
7 1310 4847 17 1450 3613
8 1690 8395 18 1460 4624
9 1880 6625 19 510 4751
10 1205 2394 20 760 5151

(i) estimate the relationship between the dependent variable (meat consumption) and the independent variable (household income
per capita) using an OLS regression model. Comment on the link between two variables. What is the meaning of the intercept and
slope coefficients?
(ii) How much higher is the level of meat consumption predicted to be if the monthly income per capita is increased by 200 thousand
VND?
(iii) Is this true if we say that given a one million VND increase in household income per capita, the value of meat consumption
increases at the same level for all households?
(iv) calculate the fitted values of the dependent variable and the residuals. Do the sum and mean of the residuals equal zero? What is
the average of the fitted values and the observed values of the dependent variables?
(v) Please interpret the R-squared. How much of the variation in meat consumption is unexplained by the regression?
(vi) calculate the standard error of the regression coefficients and the standard error of the regression. What is the unit of analysis for
the standard error of the regression?
11. Using a simple linear regression model, a researcher investigates the dependence of the monthly wage (in thousand VND) on
the number of years of education among wage workers in Hanoi in 2018.
(i) What is the average predicted wage when education equals zero?
(ii) How much does the monthly wage increase if the number of years of education increases from 12 to 16 years?
(iii) Does this model infer a causal relationship between wage and education?
(iv) What percentage of the variance in wages is explained by education?
12. A sample of 11 households with their income and food consumption is given in the table.
Income Food consumption
Thousand VND/per person/month Thousan VND/per person/month

3000 995

8208 2900

3613 1450

4624 1460

4751 510

5151 760

5884 1005

2696 100

2485 912

8860 570

1436 512

Using the OLS estimator, estimate the relationship between the dependent variable (food consumption) and the explanatory variable
( income):
+
(i) Using the regression result, please report the marginal propensity to consume food (MPCF) .

(iii) What is the MPCF if the regression model excludes the intercept? + . (Note, please use “constant
is zero” in excel”)
(iv) Using the result from the model without intercept, calculate the fitted values of the dependent variable and the residuals. Do
the sum and mean of the residuals equal zero? What is the average of the fitted values and the observed values of the dependent
variables?
(v) Does the exlussion of the intercept from the model cause the bias? Explain.