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(ui Inome)?
What will be an ideal response?
Answer: See the accompanying figure. var(ui Inome) could be a + b × Income or a + b × Income2. Hence there would be heteroskedasticity.
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A major purchaser of corporate bonds is
A) state and local governments. B) money market mutual funds. C) pension and retirement funds. D) the Federal Reserve.
Mike is able to complete a tax return in two hours earning a fee of $100 . As an alternative, he could pitch in at a volunteer car wash washing four cars in one hour. His roommate Joe would take four hours to complete a tax return earning a $100 fee and also can wash four cars in one hour. Both individuals could benefit if
a. Mike worked on tax returns for eight hours and paid Joe $5 for each car he washed b. Mike worked on tax returns for eight hours and paid Joe $10 for each car he washed. c. Mike worked on tax returns for eight hours and paid Joe $15 for each car he washed d. Joe worked on tax returns for eight hours and paid Mike $10 for each car he washed