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Dummy variables Hill et al chapter 9

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Parameters that vary between observations Assumption MR1 The parameters are the same for all observations. k= the change in E(y t ) when x tk is increased by one unit, and all other variables are held constant

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A model of house prices is the value of an additional square foot of living area, and is the value of the land alone This model omits to take account of location

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Intercept Dummy Variables

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Slope dummy variable

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Combined intercept and slope dummy variables

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The effect of a university on house prices: model

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The effect of a university on house prices: data

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The effect of a university on house prices: results

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The effect of a university on house prices: conclusions

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Qualitative Variables with Several Categories Note that E 0 is excluded. The dummy variable trap

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Interpretation of the wage equation

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Testing for the existence of qualitative effects H 0 : =0 H 1 : 0, or >0 Test using a t test

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Testing the equivalence of two regressions using dummy variables Known as the Chow Test

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Testing the equivalence of investment demand in two firms Restricted Equation (No dummies) Unrestricted Equation (Dummy applied to all parameters) F<F c =2.8826 So the restrictions are not rejected and it is concluded that the equation is the same for both forms

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An alternative way of computing SSU in the Chow test Estimate the simplified equation: for each firm separately SSE u = SSE1 + SSE2

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