Assignment II 1. In the past. many economists have studied the spending patterns of consumers in the economy. A famous study by Milton Friedman concludes that consumption is a function of permanent income, which is defined as the average level of income the consumer expects to receive well into the future. The habit-persistence theory of T. M. Brown argues that consumption is shaped by a consumer's most recent peak income - the highest income received in the recent past. To combine these two theories, an economist collected data on consumption (CONS), permanent income (PERM), and peak income (PEAK), and performed OLS to devise a model. (All values are in thousands of dollars.) CONS 12 PERM PEAK 15 17 22 15 28 19 31 21 17 19 24 19 14 24 17 27 20 20 17 25 21 29 25 15 16 19 20 22 26 a. Evaluate the multiple regression model and interpret the regression coefficients. b. If PERM goes up by $1 and PEAK remains constant, by how much will CONS changes? c. If PEAK goes up by $1 and PERM is held constant, by how much will CONS change? d. Test the model is significant at 5% level. e. Test the regression coefficients is significant at 5% level. f. What can you conclude about each type of income as a predictor of consumption and the problem of multicollinearity in the multiple regression model? g. Would multicollinearity explain the insignificance of PEAK? How can you tell?

Assignment II 1. In the past. many economists have studied the spending patterns of consumers in the economy. A famous study by Milton Friedman concludes that consumption is a function of permanent income, which is defined as the average level of income the consumer expects to receive well into the future. The habit-persistence theory of T. M. Brown argues that consumption is shaped by a consumer's most recent peak income - the highest income received in the recent past. To combine these two theories, an economist collected data on consumption (CONS), permanent income (PERM), and peak income (PEAK), and performed OLS to devise a model. (All values are in thousands of dollars.) CONS 12 PERM PEAK 15 17 22 15 28 19 31 21 17 19 24 19 14 24 17 27 20 20 17 25 21 29 25 15 16 19 20 22 26 a. Evaluate the multiple regression model and interpret the regression coefficients. b. If PERM goes up by $1 and PEAK remains constant, by how much will CONS changes? c. If PEAK goes up by $1 and PERM is held constant, by how much will CONS change? d. Test the model is significant at 5% level. e. Test the regression coefficients is significant at 5% level. f. What can you conclude about each type of income as a predictor of consumption and the problem of multicollinearity in the multiple regression model? g. Would multicollinearity explain the insignificance of PEAK? How can you tell?