Worksheet 9

I. You work for a non-profit that gives subsidies to low-income households to help them
cover their utility bills. You are trying to decide how much of a subsidy to give different
types of households. The only information that you have about a household is its size
(number of members). You gather data from the Consumer Expenditure Survey to study
the relationship between household size and expenditures in utilities. The data is in
Utility_data.
1. Run a regression of expenditures on family size. Report the regression equation here (with
either standard errors or t-stats in parentheses):
Predicted expenditures = 418.16 + 79.42*FamSize
(39.125) (13.099)
standard errors in parentheses

2. Using the equation from question 1, what is the predicted difference in expenditures between
families with 1 v. 2 people?
The difference is just the slope on FamSize, or 79.42.

3. Now, regress expenditures on family size and family size squared. Report the regression
equation (with either standard errors or t-stats in parentheses):
Predicted expenditures=152.51 + 279.55*FamSize - 27.87*FamSizeSq
(59.929) (37.189) (4.868)
standard errors in parentheses

4. Using the equation from question 3, what is the predicted average difference in expenditures
between families with 1 v. 2 people?
Method 1: compute the prediction for 1 vs 2 people and compare difference
Method 2 (approximation): compute the slope at 1.5
Answer should be close to 195.92

5. Using the equation from question 3, what is the predicted average difference in expenditures
between families with 4 v. 5 people?
Method 1: compute the prediction for 4 vs 5 people and compare difference
Method 2 (approximation): compute the slope at 4.5
Answer should be close to 28.68

6. Somewhere in the margins of this page, sketch the shape of the relationship between
expenditures and family size. Then, in words, intuitively explain here why the relationship
between family size and electricity consumption is non-linear:
 800

0
600

400

Fitted value
200

5
0

fam_size
10 -200