We are researching the charity donation behaviour of Australians. We have the following model:(E1) Donate = β0 + β1Income +β2Avg_Gift + β3Edu + uWhere:Donate is a dummy variable equal to 1 if the individual makes a donation in response to a social media campaign by our charity organisation, and 0 otherwiseIncome is the annual household incomeAvg_Gift is the average value of past donations made by the individual to our charityEduc is the individual's level of education (in years)Our data is a random sample of the population and we have 1,614 observations. You should assume E [u | Income, Avg_Gift, Educ] = 0.Using the information above, please answer the following 3 questions.[i] Referring to Model (E1) above, interpret the coefficient β1. [ii] You know that this model will suffer from heteroskedasticity. Why is this the case? Explain your reasoning. [iii] In your own words, what is heteroskedasticity?

Solution: From the given information, the regression model is

Answered: We are researching the charity donation…

4th Edition

ISBN:9781285463247

Author:David Poole

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Chapter7: Distance And Approximation

Section7.3: Least Squares Approximation

Problem 31EQ

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We are researching the charity donation behaviour of Australians. We have the following model:

(E1) Donate = β0 + β1Income +β2Avg_Gift + β3Edu + u

Where:

Donate is a dummy variable equal to 1 if the individual makes a donation in response to a social media campaign by our charity organisation, and 0 otherwise
Income is the annual household income
Avg_Gift is the average value of past donations made by the individual to our charity
Educ is the individual's level of education (in years)

Our data is a random sample of the population and we have 1,614 observations. You should assume E [u | Income, Avg_Gift, Educ] = 0.

Using the information above, please answer the following 3 questions.

[i] Referring to Model (E1) above, interpret the coefficient β1.

[ii] You know that this model will suffer from heteroskedasticity. Why is this the case? Explain your reasoning.

[iii] In your own words, what is heteroskedasticity?

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