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.
individual with lower income have higher savings

b.
individuals with lower income have higher savings

c.
educated people have higher savings than those who are not educated

d.
uneducated people have higher savings than those who are educated

Answer 1

(C)Educated people have higher savings than those who are not educated

Explanation:

The model which is used to determine the annual savings of an individual on the basis of his annual income and education is given below:

`Savings = \beta_0+\delta_0 Edu + \beta_1Inc+u`

The variable "Edu" takes a value of 1 if the person is educated. The coefficient
`\delta_0` measures the impact of education on a certain individual’s annual savings. If
`\delta_0`>0, it has a positive impact. Therefore, educated people should have higher savings than those who are not educated.