Consider Estimating a Consumption Function from a Large Cross-Section Sample

question 19

Essay

Consider estimating a consumption function from a large cross-section sample of households. Assume that households at lower income levels do not have as much discretion for consumption variation as households with high income levels. After all, if you live below the poverty line, then almost all of your income is spent on necessities, and there is little room to save. On the other hand, if your annual income was $1 million, you could save quite a bit if you were a frugal person, or spend it all, if you prefer. Sketch what the scatterplot between consumption and income would look like in such a situation. What functional form do you think could approximate the conditional variance var(u_i | Inome)?

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Definitions:

Psychotherapy

A treatment method for mental health conditions and emotional distress, using psychological techniques to encourage communication and insight.

Defense Mechanisms

Psychological strategies employed unconsciously by individuals to protect themselves from anxiety and to cope with reality or maintain self-image.

Oedipal Crisis

An Oedipal Crisis, in Freudian theory, is a phase in a child's development characterized by conflicting emotions toward the opposite-sex parent and envy or rivalry toward the same-sex parent.

Denial

In psychoanalytic theory, the defense mechanism that allows the mind to deny that a current source of anxiety exists.