ECO 515 (Summer 2020)

Worksheet -4

Name-Sarah Nuzhat Khan

ID-20175008

Q1. It is argued that the relationship between earnings and age is concave. Earnings increases till some
age and falls after that. Graphically the relationship is described below.

a) Write down an appropriate Linear Regression Model incorporating the non-linear relationship
between earnings and age. Include education, experience, hours worked and married (an indicator
variable) as regressors in your model.

Answer: 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 𝛽0 + 𝛽1(𝑎𝑔𝑒) + 𝛽2(𝑎𝑔𝑒)2 + 𝛽3(𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛) + 𝛽4(𝑒𝑥𝑝𝑒𝑟𝑖𝑒𝑛𝑐𝑒) + 𝛽5(ℎ𝑜𝑢𝑟𝑠

𝑤𝑜𝑟𝑘𝑒𝑑) + 𝛽6(𝑚𝑎𝑟𝑟𝑖𝑒𝑑) + 𝑢

b) Suppose a snapshot of the sample data is given below. Explain how you will construct the new
variable Age-sqr. What would be the STATA command to generate this new variable?

Answer:

ahe yrsofeduc married age Age-sqr

13.07692 13 1 56 3136
38.46154 18 0 59 3481
62.39316 12 0 52 2704
21.36752 18 0 38 1444
15.68627 14 0 38 1444
22.59615 13 1 41 1681
62.125 13 0 42 1764

c) What are the expected signs of the coefficients? Explain.

The estimated model is reported below:

Variables: Wage: monthly earnings in $ Hours: average weekly hours Educ: years of education Exper:
years of experience Age: age in years Married: 1 if married, 0 if others

d) Write down the estimated equation.

Answer:

̂ = −728.35 − 2.5 (ℎ𝑜𝑢𝑟𝑠) + 72.8 (𝑒𝑑𝑢𝑐) + 11.22 (𝑒𝑥𝑝𝑒𝑟)

𝑤𝑎𝑔𝑒

(1625.14) (1.69) (6.5) (3.743)

+181.69 (𝑚𝑎𝑟𝑟𝑖𝑒𝑑) + 20.28 (𝑎𝑔𝑒) − .13(𝑎𝑔𝑒 2 )

(39.625) (98.64) (1.48)

e) What is the estimated partial effect of age on wage? Answer: Partial Effect of Age on Wage:

Answer: Partial Effect of Age on Wage:

𝜕(𝑤𝑎𝑔𝑒)
𝜕(𝑎𝑔𝑒)
= 20.28059 − 2(0.1334486) (𝑎𝑔𝑒) = 20.28059 − 0.2668972(𝑎𝑔𝑒)

f) What age earnings is estimated to reach maximum?

Answer:

FOC:
𝜕(𝑤𝑎𝑔𝑒)
𝜕(𝑎𝑔𝑒)
= 20.28059 − 0.2668972(𝑎𝑔𝑒) = 0

⇒ 𝑎𝑔𝑒 =20.28059 / 0.2668972= 75.98 ≈ 76

SOC:

𝜕2𝑤𝑎𝑔𝑒 ̂ / 𝜕𝑎𝑔𝑒2 = −0.2668972 < 0

Hence, we can say that from estimated equation at age=76 years the estimated earnings will reach its
maximum.

g) Can we conclude that the relationship between earnings and age is concave? Explain.

Answer:

A relationship or function is concave on an interval, if its first order partial differentiation moronically
decreasing on that interval or the function has a decreasing slope.

As per that, we can find that the slope of the estimated relationship between earning and age is
decreasing [20.28059 − 0.2668972(𝑎𝑔𝑒)]. Hence, we can conclude that relationship between earning
and age is concave.

h) Can we conclude that married people earn more on average? Explain.

Answer: Yes, according to the estimated equation married people earn more on average.

As the 𝛽 ̂ 𝑚𝑎𝑟𝑟𝑖𝑒𝑑 = (𝑤𝑎𝑔𝑒|𝑚𝑎𝑟𝑟𝑖𝑒𝑑 = 1) − (𝑤𝑎𝑔𝑒|𝑚𝑎𝑟𝑟𝑖𝑒𝑑 = 0) = 181.6901

Q2. Answer:
a) Do we need to include the cubic experience term in this regression?

Answer:

No, we do not need to include the cubic experience term in this regression as the p-value of estimated
coefficient is larger than 𝛼 = 0.01, 0.05, 0.10. That mean according to the data, we cannot reject the null
hypothesis that 𝛽𝑒𝑥𝑝𝑒𝑟𝑖𝑒𝑛𝑐𝑒3 = 0.
−.052 − 0
𝑡𝑒𝑥𝑝𝑒𝑟3 = = −0.59
0.0883

|𝑡𝑒𝑥𝑝𝑒𝑟3 |<1.96, i.e. regression coefficient of exper3 is not statistically significant. We may omit
it.

b) Do we need to include the quadratic experience term in this regression?

We cannot tell whether quadratic term is needed or not.

Q3. Answer:
a) Do we need to include the quadratic experience term in this regression?

−.70 − 0
𝑡𝑒𝑥𝑝𝑒𝑟2 = = −1.22
0.5706811

|𝑡𝑒𝑥𝑝𝑒𝑟2 |<1.96, i.e. regression coefficient of exper2 is not statistically significant. We may omit
it.

b) Do we need to include the experience term in this regression?

We cannot tell as we can only comment about the highest order polynomial.

Q4.

Answer:
a) Do we need to include experience in this regression?

Answer:

It is statistically significant. Therefore, we need to include experience in this model.