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:

Vascular Cambium

A lateral meristem that produces secondary xylem (wood) and secondary phloem (inner bark). Compare with cork cambium.

Epidermal Outgrowths

Structures like hair, feathers, or scales that develop from the epidermis, the outer layer of skin, in various organisms.

Plasmodesmata

Microscopic channels traversing the cell walls of plant cells and some algal cells, enabling transport and communication between them.

Trichomes

Hair-like outgrowths on plants that serve various functions, including protection against herbivores and insulating against frost.