The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education. Savings = β₀ + ₀ Edu + β₁Inc + u The variable 'Edu' takes a value of 1 if the person is educated and the variable 'Inc' measures the income of the individual. Refer to the above model. If 0 0, _____. A)uneducated people have higher savings than those who are educated B)educated people have higher savings than those who are not educated C) individuals with lower income have higher savings D) individual with lower income have higher savings

Question

The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education. Savings = β₀ + ₀ Edu + β₁Inc + u The variable 'Edu' takes a value of 1 if the person is educated and the variable 'Inc' measures the income of the individual. Refer to the above model. If 0 > 0, _____. A)uneducated people have higher savings than those who are educated B)educated people have higher savings than those who are not educated C) individuals with lower income have higher savings D) individual with lower income have higher savings

Quizplus · Accepted Answer

If the coefficient for the interaction term between education and income (11eab06d_24f6_f694_beed_c512d598b609_TB2133_11) is positive, it implies that being educated enhances the effect of income on the savings of an individual. In other words, educated people have higher savings than those who are not educated. The coefficient 11eab06d_24f7_1da5_beed_f773039951d5_TB2133_11 ₀ measures the impact of education on an individual's annual savings. If it has a positive impact, as in this case, educated people should have higher savings.

The Following Simple Model Is Used to Determine the Annual