Suppose You Are Interested in Explaining Variation in Vacation Spending

question 13

Essay

Suppose you are interested in explaining variation in Vacation Spending in a sample of 12,486 men and women and that you estimate the sample regression function (standard errors in parentheses)

$\begin{array}{llcc} \text {Vacation Spending}_ { i } = &639.82 +& 0.22 \text {Income} { i } + &217.39 \text {College Graduate}_ { i }\\&( 134.62 ) &( 0.05 )&(91.43)\end{array}$

a)Which variable do you suspect could be responsible for heteroskedasticity in this model? Why? Explain.
b)How would you use the Goldfeld-Quandt test to determine whether heteroskedasticity is present? Explain.
c)Suppose you know that heteroskedasticity takes the form $$h ( x ) = \operatorname { Income } _ { i } ^ { 2 } \cdot \sigma ^ { 2 }$$
.How would you use Weighted Least Squares to correct for the heteroskedasticity? Explain.

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Definitions:

Perfect

In legal and financial contexts, to complete the necessary legal steps to secure a lien or claim on property as a security interest.

Collateral

Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default.

Debtor

An individual or entity that owes money or an obligation to another, the creditor.

Secured Party

A lender or creditor who has an interest, typically through a lien, in the collateral offered by a borrower or debtor to secure a loan or obligation.