Suppose you estimate a population regression function where Y represents the hom

Question

Suppose you estimate a population regression function

where Y represents the home mortgage interest rate in percent (values like 6.2),
X1 represents the income of the homeowner in thousands of dollars,
X2 represents the down payment on the home in thousands of dollars and
X3, X4 and X5 represent the region of the country in which the homeowner resides (X3 = 1 if homeowner is from Northeast; X4 = 1 if homeowner is from South, X5 = 1 if homeowner is from Midwest (the omitted region is West)).

Estimating this regression you obtain:

From the regression above, the predicted home mortgage interest rate for a house in the South where the homeowner earns $80,000 with a $40,000 down payment is:

A) 7.0%

B) 7.3%

C) 7.4%

D) 7.6%

E) Cannot be determined with the information given

Regression Table Coefficient Constant 12 X1 -0.05 X2 -0.01 X3 0.2 X4 -0.3 X5 -0.1

Explanation / Answer

Predicted home mortgage

= 12 - 0.05(80) - 0.01(40) + 0.2(0) - 0.3(1) - 0.1(0)

= 7.3

Hence,

The answer is 7.3%

Option B is correct.

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