Question

How do you interpret the estimated value of coefficient of EDU in the following equation:

Answer 1

Answer:

The correct option is d

Step-by-step explanation:

From the question we are told that

The equation is $ln (SALARY) = 1 + 0.02 ln(EDU)$

generally

$ln (e) = 1$

=> $ln (SALARY) = ln (e) + 0.02 ln(EDU)$

Apply log rules

=> $ln (SALARY) = ln[ e(EDU)^{0.02} ]$

=> $SALARY = e(EDU)^{0.02}$

When EDU is increase by 1% we have that

$\frac{1}{100} * EDU + EDU$

=> $1.01 EDU$

So the new SALARY will now be

$SALARY'' = e(1.01EDU)^{0.02}$

The ratio by which the new SALARY will increase is obtain by dividing the value of new SALARY (SALARY'' ) with that of the former SALARY (SALARY) and this mathematically represented as

$\frac{SALARY'' }{SALARY} = \frac{e*1.01 (EDU)^{0.02}}{e (EDU)^{0.02}}$

=> $\frac{SALARY ''}{SALARY} = 1.0002$

Generally the percentage increase of salary is mathematically evaluated as

$k= (\frac{SALARY''}{SALARY} - 1 ) * 100$

=> $k= (1.0002 - 1 ) * 100$

=> $k= 0.02 \%$