Math Problem Statement
Question 5 (25 marks) In the bustling town of Economica, ten households were se- lected for an insightful study aimed at uncovering the relationship between their income and consumption patterns. The objective was simple yet profound: to understand how much of the consumption expenditure could be explained by the household income. The research team noted the annual income of each household and their corresponding annual consumption. Here is the snapshot of the data collected (can be downloaded here):
(a) Determine the Pearson correlation (r) between income and consumption and dis- cuss your result. [2.5+2.5 marks]
(b) To analyze this relationship, you are required to employ the Ordinary Least Squares (OLS) regression method. This method helps in understanding how the dependent variable (consumption) changes with the independent variable (income). Present your results [10 marks]
(c) Interpret the estimated coefficients. Does this seem like a promising model? Ex- plain. [10 marks]
Solution
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Math Problem Analysis
Mathematical Concepts
Statistics
Pearson Correlation
Linear Regression
Ordinary Least Squares (OLS)
Formulas
Pearson correlation coefficient: r = Σ((X - X̄)(Y - Ȳ)) / (√Σ(X - X̄)²√Σ(Y - Ȳ)²)
OLS Regression: Y = β₀ + β₁X + ε
Theorems
Gauss-Markov Theorem
Properties of Pearson correlation
Suitable Grade Level
Undergraduate Level (Economics/Statistics)
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