Suppose you've regressed profits across stores (i) in Indiana and Michigan over two years (t) on an Indiana dummy variable as well as on an interaction between an Indiana dummy variable and Year 2 dummy variable. Thus, your regression equation is: Profits_it = β₀ + β₁Indiana_it + β₂Year2_it Indiana_it + U_i. What is the marginal effect of a store being in Indiana based off this regression equation? A) β₀ + β₁ + β₂ B) β₁ + β₂× Year2_it C) β₀ + β₁ D) β₂

Question

Quizplus · Accepted Answer

The marginal effect of a store being in Indiana is captured by the coefficient on the Indiana dummy variable, which is β₁ in this regression equation. However, because there is an interaction term between the Indiana dummy variable and the Year 2 dummy variable, we need to include the coefficient on the interaction term as well, which is β₂× Year2_it. Therefore, the marginal effect of a store being in Indiana is β₁ + β₂× Year2_it. Option A is incorrect because it includes the constant term and does not differentiate the effects of the Indiana dummy variable and Year 2 dummy variable. Option C is incorrect because it does not include the Year 2 dummy variable. Option D is incorrect because it only includes the coefficient on the interaction term, not the Indiana dummy variable.

Suppose You've Regressed Profits Across Stores (I) in Indiana and Michigan