Suppose we estimate a model in which salary in thousands of Euros is the dependent variable and years of education is the independent variable. We get a result that says Income-hat = 20 + 2 Years Education. Which of the following is correct:
A) Two years of education increases income by one.
B) An extra year of education is expected to increase income by 2.
C) An individual with 10 years of education is expected to have an income of 20.
D) The expected income for someone with 0 years of education is 2.

Question

Quizplus · Accepted Answer

The coefficient on Years of Education is 2, which means that for each additional year of education, we expect to see a 2-unit increase in salary (in thousands of Euros). Option A is incorrect because a two-year increase in education would lead to a 4-unit increase in salary according to the model (since 2 * 2 = 4). Option C is incorrect because we cannot predict an individual's income based solely on their years of education -- there are other important factors that determine earning potential. Option D is incorrect because plugging in 0 for Years Education in the model equation would result in Income-hat = 20 + 2 * 0 = 20, so we would expect an individual with 0 years of education to earn 20 thousand Euros, not 2.

Suppose We Estimate a Model in Which Salary in Thousands