Assume That You Had Data for a Cross-Section of 100

question 61

Essay

Assume that you had data for a cross-section of 100 households with data on consumption and personal disposable income. If you fit a linear regression function regressing consumption on disposable income, what prior expectations do you have about the slope and the intercept? The slope of this regression function is called the "marginal propensity to consume." If, instead, you fit a log-log model, then what is the interpretation of the slope? Do you have any prior expectation about its size?

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Definitions:

Bonus Pay

Additional compensation given to employees beyond their regular salary, typically as a reward for achieving certain goals or exceptional performance.

Lump-sum Payments

One-time payments made for the entire amount of an obligation or transaction, as opposed to installments.

Base Wage

The initial rate of pay that an employee receives, excluding additional compensation such as bonuses, overtime, or allowances.

Incentive Compensation Systems

Payment programs designed to motivate employees' performance by aligning their incentives with the organization's goals, typically through bonuses, profit sharing, or stock options.