You are interested in the effect of household income on the amount of mortgage d

Question

You are interested in the effect of household income on the amount of mortgage debt held. You collect a random sample and use OLS to estimate the following model: (Debt) = 1.0 + 0.25(Income).

R^2=.34

SER=425

The error for B0=1.2 and the error for B1=.1

Debt is mortgage debt in one hundred thousands and Income is measured as total annual household income in ten thousands.

a. What is your conclusion regarding the effect household income on mortgage debt?

b. On average, how much mortgage debt will a household with $100,000 of annual income have?

Explanation / Answer

a) There is not much effect household income on mortgage debt

since coeffcient of determination (R2) is only 34% out of 100%

b) (Debt) = 1.0 + 0.25(Income)

Estimated Debt = 1.0 + 0.25 * 100000 = $25001

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