Lecture notes 3 dummy variables

Question 1

What is the implication of having multiplicative dummy variables?

Answer 1

Not only are the different coefficents shifts but the slope is also changed.

Question 2

Assume a model with multiplicative like

How would you interpret the change in Y if you increase X2 by 1 unit

Answer 2

Y = B0 + B1X1 + B2X2 + B3X1X2

DellY/dellX2
= B2 + B3X1

then go through when X1 = 0
and when X1 = 1 and give the different interpretations.

Question 3

When you have multiple multiplicative categories what is important to do?

Answer 3

-You must omit one of the categories as a baseline.

Question 4

If you had a model with regions X1, X2, X3 and X4 and the model was
wage = B0 + B1X1 + B2X2 + B3X3 + B4Educ + B5X1 * Educ + B6X2 * Educ + B7X3 * Educ

how would you test for regional differences?

Answer 4

You would test that all intercepts and slope coefficients are equal.

Bj = 0 for j=1,7

RSSU-RSSR/ 6/ RSSU/ n-8

Question 5

What is a multiplicative dummy variable?

Answer 5

When a categorical variable is multiplied by a continuous one.

Question 6

What is an interactive dummy variable?

Answer 6

When more than one categorical variable are multiplied together.

Question 7

How do you interpret coefficients that are interactive?

Answer 7

-Firstly you look for all the different scenarios that the dummies can be
-Secondly, you take differences between these.

Question 8

In a model Y = B0 + B1X1 + B2X2 + B3 X1 * X2

Answer 8

What is the interpretation of B3?
It is the difference in difference.

Question 9

If you have a model log(wage) = 9.12 - 0.12Edu - 0.13Midwest - 0.12South - 0.03West + e

Answer 9

How would you interpret -0.13 is the decrease when you go from default to midwest.

Question 10

How do you calculate new coefficients if the default is changed?

Answer 10

You just need to draw horizontal lines that show the changes and then work from these with the default.