Economics: Salary Regression Analysis

This economics assignment focuses on analyzing a regression model that predicts starting salaries for graduates based on the number of years they have been working since graduation. Students will interpret the regression coefficients, calculate predictions for a specific case, assess the standard error of the estimate, and discuss the normality assumption underlying the model. The assignment emphasizes understanding key concepts in econometrics and applying them to real-world data.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
Name of Student:
Name of University:
Author Note:

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TABLE OF CONTENT
PART A......................................................................................................................................2
PART B....................................................................................................................................19
REFERENCE...........................................................................................................................24

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PART A
Q P TR TC FC VC MC AC
0 35 0 25 25 0 0
1 35 35 50 25 25 25 50
2 35 70 100 25 75 50 50
3 35 105 120 25 95 20 40
4 35 140 155 25 130 35 38.75
5 35 175 190 25 165 35 38
6 35 210 250 25 225 60 40.16
7 35 245 390 25 365 140 55.71
a) Based on the available information about perfect competition market price, quantity and
total cost the total revenue, marginal cost, variable cost and average cost are calculated in the
following table:
b) In the perfect completion market, the short run profit maximizing output is at where
marginal cost is equal to marginal cost. Here both t unit 4 and 5 the MR = MC hence the
equilibrium output level would be at 5 unit.

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c) At the profit maximising level of output the firm incurs total cost TC = 190 and earns total
revenue TR = 175. Hence the firm is making loss of TR- TC = 175 – 190 = -15 unit
d) The firm faces two kind of cost in the production happening in short run. Fixed cost and
variable cost. Even though the firm is seemed to make loss but the loss amount is less than
total fixed cost. This implies that the revenue firm earns is meeting up the variable cost and
part of fixed cost. If the firm stops production then it has to anyhow pay for the full fixed cost
compared to partial compensation made presently through loss. Thus the firm will continue
its production in the short run even after making loss.
d) In the long run the market equilibrium is P = MC= Min AC. From the table the minimum
average cost is 38 then it can be concluded that the same is going to be price level in the
market in the long run.
The demand elasticity is denotd as ed= dq/q
dp/ p
= dq/dp . p/q
Given dq/dp . p/q = -1
dq/2 *4/40 = -1
dq = -20
So for 2 unit increase in price there would be 20 unit fall in the quantity demanded.
dq = 20 dp

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Integrating both sides we get:
Q = 20P + c This is the derived demand curve.
The weekly consumption would fall by 20 unit if price rises to $4. The current amount
consumed weekly would be 20 million unit.
The supply equation P = 2 + Q....1)
Then equating demand and supply we get market equilibrium price and quantity.
Demand equation: Q = 20P + c
Given p = $2 and Q = 40 million unit, we get the value of c = 0
Then demand equation is Q = 20P........2)
Putting the value of Q from 2) in 1)
P = 2 + 20P
-19P = 2
P = -2/19
Hence Q = - 40/19
Here both the price and quantity in equilibrium are negative which is absurd for real market
to exist.

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No the market don’t exist since again the market price and quantity have negative values
which is absurd and not applicable in real market economy.
a) Demand equation: P = 10 – Q
Supply Equation : P = Q
Equating both we get the equilibrium demand and quantity.
Q = 10 – Q
2Q = 10
Q = 5 and P = 5
b) The consumer surplus is CS = ½*5*5 = 25/2 Unit
Producer Surplus PS = ½*5*5 = 25/2 unit
Total Surplus = 2 * 25/2 = 25 unit
If govt. imposes tax of $ 2 per unit bought, then the market price effaced by consumers would
rise by $2 .
From the demand equation it can be said: Q = 10- (P+2)= 8-P The new equilibrium price and
quantity is now:
P = 8 –P
P = 4, Q=4
Price received by the sellers are now $4 instead of $5 and this $1 sellers are paying as tax.
Consumers are paying $6 after tax.

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D
S
5
54
A
O
B
C
A1
B1
O
1
Now the total surplus is TS = 2* ½*4*4 = 16 unit. This is shared by sellers and consumers
Then the deadweight loss for imposition of tax has been 25-16= 9 unit.
Area AOB is the initial Consumer Surplus, area BOC is the initial producer Surplus. After
imposition of tax, the Consumer Surplus falls to A1OB1 and Producer Surplus falls to
B1O1C.

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T
The area in yellow shows the deadweight loss that is equivalent to the leakage from social
welfare.

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a) In the perfect competition market there is no scope of deadweight loss. The price
prevailing in the market is determined by the market force and sellers act as price taker. They
don’t actually have any power or discretion to change the price level in order to earn more
profit from the sales. The products are perfectly homogenous or identical with each other.
Price is equal to marginal revenue and the equilibrium is attained where marginal cost is
equal to marginal revenue. This market is more efficient
The non price discriminating monopolist charges one price in the market which is way above
the market price. There lies his monopoly power to capture more profit out of sales of given
output. The higher price charged than perfect competition level makes the monopolist loose
producer surplus and consumer too looses surplus. In this market equilibrium quantity is
attained where marginal revenue is equal to marginal cost. Here price is greater than MC. The
deadweight loss is maximum here.
The price discriminating monopolist operates at equilibrium only when the marginal cost
equals the aggregate marginal revenue curves that he faces in different markets of
discrimination. Since the monopolist target different market with different price level, here
chances are low that he loses producer surplus. Similarly consumers get products at different
prices based in the difference in the market. This type of monopoly is efficient than the non-
pric discriminating that faces greater loss of surplus.
b) Government intervenes mostly into natural monopolies where the producer go for large
scale production as it reduces his huge fixed cost as more production takes place. In this kind
of situation the producer produces so huge that become more than sufficient to cater to the
market demand . The huge share of market becomes dependent on the single producer who
poses threat to new firms to enter. In order to ascertain the wellbeing of mass and stop natural
monopolist to take advantage of the market share, government intervenes and takes control.

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Like oil producers in a nation can be natural monopolist but they are always under
supervision of government since price of oil is crucial for the market and entire economy.
Government create monopolies in order to be sole provider and decision maker regarding the
supply, pricing and subsequent policies in the market. For example defences production and
railways government has got its own monopoly in pricing sales strategy, supply and
marketing.
Country Production of Machine
(per hour)
Production of Food
(per hour)
A 10 20
B 30 10
From the example an easy estimation can be done based on the information of the
performance in both the sector by two countries per hour basis. The country A is good in
producing food and B is good in producing machine. Now if we look at the opportunity cot
concept, then we find that opportunity cost of food production in A is 10/20= ½ which is
lesser than the opportunity cost of producing machine as 1 unit of machine production let the
country loose the opportunity of producing 2 units of food. The food production has lesser
opportunity cost for A hence A would produce food and similarly B would specialize in
producing machine. Both the countries would produce one good as per their specialization
and trade for the other good. This theory would call for national free trade policy among
global region without barriers and cost of trades.
7.

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D
S
D
S
Inelastic Demand & incidence of tax is more on buyers
Elastic Demand & incidence of tax is more on sellers
Taxes imposed by government on the can be of two types sales and excise. In both type of tax
the common tendency of seller is to pass the burden of tax on consumer. Now if the
consumers have inelastic demand, the burden of tax would fall maximum on them as quantity
demanded would not fall that much even though tax imposed price is now high. Seller face
less burden of tax. Opposite happens when consumers are more responsive to the tax imposed
higher price and reduce demand drastically but the suppliers do have to produce and incur the
tax burden. In this case sellers bear the maximum of the tax burden and consumers lesser.
Thus greater the demand elasticity, higher is the incidence of the falling as burden on the
demanders.
8. If the govt makes open market purchase of the securities then it is adding more money to
the existing money level operative in the economy. As a result money supply would go up.
This would shift the LM curve rightward and as a result rate of interest would fall whereas
national income or gdp would rise. The reason behind such is that lower rate of interest
would increase aggregate demand of the market through increase in investment.

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r
Y
LM
IS
AD
Y
P
Inelastic Demand & incidence of tax is more on buyers
9. Deflation is a situation when contraction of money supply takes place in the economy and
as a result the nominal level of price and interest falls. The purchasing power of the money
rises while an economy id diagnosed with deflation. Deflation causes debt burden to increase
and more unemployment. Government policies to deal with deflation which is just opposite
the inflation is open market operation, lowering rate of interest or expansionary fiscal policies
so that economy gets injected with more money supply. Greater money supply would boost
the money market equilibrium that would increase the AD and national output even when
price would be falling but that wont affect the economy.

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r
Y
LM
IS
AD
Y
P
10. If patrol price increases, then it would increase the general price level of the national
economy as cost push inflation would take over. Oil is used as input of industrial production
as well as major fuels hence the aggregate supply would fall as the production would become

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AD
AS
P
Y
costlier. This raises price level and makes the national production fall.
b) A rise in general price level can take place if in the same supply situation, aggregate
demand increases or in case of same demand aggregate supply falls. In the former case the
economic output expands whereas in the second case the economic output falls.
c) If the world economy enters into recession then the both the aggregate demand and supply
would fall
This leads to fall in national output since demand falls and supply falls too and price level
increases due to recessionary pressure.

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AD
AS
P
Y
AS
AD
d) Real estate business booms which implies both the demand and supply of real estate rises.
This would lead to rise in the price and quantity sold in the market.

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11.a) Following clause 1 and 3, if A confesses then the best strategy for his partner that is
Criminal B would be to confess as this would earn him 3 years prison instead of 5 years
prison for not confessing.
b) If prisoner A does not confess and remains silent somehow then the best strategy by his
partner B would be to confess as that would allow him to be free within 0.3 years.
c) Here confess by both the criminals is Nash equilibrium.
Nash equilibrium is ultimate solution of a non cooperative game where no player each having
perfect knowledge of others’ equilibrium strategies have no incentive to deviate from the
decision as there is no gain associated with it, Two of the players reach ultimate position best
for them given the strategies of other.
12. Whenever the market wage rate is too low the supply of the labour become less or
demoralized. A generally higher than market rate of wage is fixed as minimum wage rate to
be operative in the labour market. Employers or demander of labour cannot offer less wage
rate than that. It acts as price floor and at that high wage rate supply of labour is more than
the demand of labour which gives birth to unemployment. The cost of minimum wage might
not hurt the employers and produce in general efficient outcome for the entire market if the
price productivity of the producers are scaled up. The higher cost per unit of labour employed
gets more than offset compared to gain received by the per employee work effort.

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ECONOMICS ASSIGNMENT
LD
LS
Wage Min
Unemployment
13.a) DD equation: P = 12-Q,
SS equation: P = 2Q
Hence the equilibrium price and quantity are:
2Q = 12 – Q
3Q = 12

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 Q = 4 => P = 8
Consumer Surplus- ½ * 4* 4 = 8 unit
Producer Surplus = ½ *8*4 = 16 unit
Total Surplus = 24 unit
Now government imposes tax Of $3 on per unit bought. Consumers face price P+3
instead of P. From the demand equation it can be said Q = 12 – (P+3)= 9 - P
Supply P = 2Q
Then the equilibrium price is now Q = 9 – 2Q
 3Q = 9
 Q =3 & P = 6
Now sellers receive price $6 instead of $8 before. Since the supply is inelastic the
sellers pay $2 as tax and consumers pay $1 which means consumers pay $9 now after
tax imposed.
Now CS = ½* 3* 3= 9/2 unit
PS = ½*3*6 = 9 unit
Hence total surplus TS = 13.5 unit
The DW Loss = 24- 13.5 = 10.5 Unit

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D
S
5
43
A
O
B
C
A1
B1
O1
Q
P

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PART B
1.
Values (x) Frequency (f) xf
3 1 3
4 1 4
5 1 5
6 1 6
7 2 14
8 3 24
9 1 9
Total 10 65
Mean = ∑xf/∑f
Putting the values we get Mean (x) = 65/10 = 6.5
There are total 10 observations in the given discrete series. Arranging the data in ascending
order we get: 3, 4, 5, 6, 7, 7, 8, 8, 8, 9
Hence the median will be average of n/2th and n/2+1th observation.
The calculated median is 7+7/2= 7
Mode is the highest number of frequency corresponding to the value of variable. Here 8
appears 3 times and indicates greater frequency compared to the other given values. So the
mode is 8.

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Arranging the data in ascending order we get
3, 4, 5, 6, 7, 7, 8, 8, 8, 9
Here median is at 7. The lower half is (3,4,5,6) and the median in the lower half is the first
quartile.
Q1 = 4+5/2 = 4.5 This implies 25% of the data in the data set lies below 4.5 and rest 75% lies
above it.
The upper half is (8,8,8,9) and the median of this part is third quartile.
Q3 = 8+8/2 = 8 This implies, 75% of the data is below 8 and rest 25% is above it.
Hence the Interquartile Range = Q3 – Q1 = 8 – 4.5 = 3.5 This implies the difference between
third quartile and first quartile and denotes the 50% data lying in between.
From a) we know mean (x ) = 6.5
The formula of standard deviation = √i/n∑ {x-mean(x)}2
= √(9-6.5)2 + (8-6.5)2 + (5-6.5)2 + (8-6.5)2 + (3-6.5)2 + (4-6.5)2 + (7-6.5)2 + (8-6.5)2 + (6-6.5)2
+ (7-6.5)2/10
=√ 2*(2.5)2 + 4*(1.5)2 + 3* (0.5)2 + (3.5)2/10
= √ 12.5 + 9 + 0.75 + 12.25 / 10
= √ 34.5/10
=√ 3.45
= 1.85

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d) Both the standard deviation and variance are measure of dispersion that captures the
variability of the data around its mean. The standard deviation is measure of dispersion that
gives the square root of the mean value of the squared deviation of the values of variables
from its mean. It gives idea of the spread of the values of variable from its mean. It is the
square root of sample variance. The variance is in square term which makes the deviation in
positive terms and adds more weight to larger differences. The unit of variance varies from
that of the variable but the unit of standard deviation is same as the unit i data set.
2.
a) Looking at the data it can be identified, the happiness quotient of the husbands range from
40-80 and more than half population lies within the scale 60-70. For wives the scale is 50-60
where maximum responses are recorded. Moreover the general range of the response varies
from 50-80. From the observation it can be concluded on an average happiness in marriage
from both the side of the husband and wife is 60.
b) Covariance ∑[{x-mean(x)}{y-mean(y)}]/n
Here Mean (x)= 60+70+80+80+80+40+50+60+65+65/10
= 650/10
= 65
Mean (y) = 50+65+81+79+85+35+55+55+65+60/ 10
= 630/10
= 63
Cov (x,y) = (-5)*(-13) + 5*2 + 15*18 + 15*16 + 15*22 + (-25)*(-28) +(-15)(-8) + (-5)(-8) +
0*2 + 0*(-3) / 10

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=1775/10
= 177.5
Var(x) = ∑{x-mean(x)}2/n
= 25 + 25 + 225 + 225 + 225 + 625+ 225 + 25/10
= 1600/10
=160
SD(x)= √160 = 12.64
Var(y) = ∑{x-mean(y)}2/n
= 169+ 4+ 324 + 256 + 484 + 784 +64 + 64 + 4 + 9/10
= 2098/10
= 209.8
SD (y) = √209.8
= 14.48
c) Correlation coefficient = cov (x, y)/ sd(x)* sd(y)
= 177.5/ 12.64*14.48
= 177.5/183.02
= 0.9698
The value of correlation coefficient is very close to 1 hence the relation between responses of
the husbands and wives regarding their feeling of happiness in marriage.

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3. Let X denotes the sample set of values of the outcomes when the balanced coin is
tossed 3 times. X = {HHH, HTH, THH, TTH, HHT, HTT, THT, TTT}
a)The expected value of X can be calculated as follows:
Value of x 0 1 2 3
P(x) 1/8 3/8 3/8 1/8
E(x) 0*1/8 + 1*3/8 + 2*3/8 + 3*1/8 = 12/8 = 3/2
From the above table in part a), P(x=2) = 3/8
P(x≥2) = P (x=2) + P(x>2)
= 3/8 + 1/8
= 1/2
4.a) The values of A and B are derived from the relationship between the value of t-stat,
standard error and coefficient.
t-stat = coefficient/ standard error
Thus value of A = 53.12 and value of B = -4.90
b) the intercept term is estimated to be 865.87 which implies that without the impact of
distance to the CBD, the price of houses are found to be 865.87 thousand dollars. The
parameter associated with explanatory variable distance to CBD is -14.75 . It shows negative

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relation between price and distance. More the distance to the CBD less is the price and for
housese lying nearer to CBD costs high.
c) Putting the values in the regression equation and running expectation we get:
E (Y) = 865.87 - 14.75 E (X) + E (e)
The standard error in the table gives the estimated error equal to 137.13 which is pretty high.
Hence for X=15 km, the predicted price would be-
865.87 – 14.75*15 + 137.13
=1003.17 – 221.25
= 781.92 thousand dollars
For X = 60 km the price is
865.87 – 14.75*60 + 137.13
= 1003.17 – 885
= 118. 17 thousand dollars
d) The overall estimate of the table is that reliable because of lower R square value and
higher estimated error of the regression. R square = 0.4615 which implies only 46% of the
variation in Y can be explained by variation in X.
5.a) from the good value of r square which is 0.8643 it can be said that almost 86% of the
salary of the graduates can be explained by the number of years after graduation. Moreover
the p values are significant rejecting the null hypothesis of coefficient of regression equals to
zero that further implies there is strong relationship between Y and X.

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b) From the table we can write;
Y = 40.73 + 6.42X + 9.45
Here the survey is done in 2012 on the person who graduated in 2008 hence X = 4. The
predicted salary for the person would be:
E(Y) = 40.73 + 25.68 + 9.45 = 75.86 thousands AUD
c) The standard error of the estimate is found following the formula
SE y,x = √∑[Y- E(Y)]2/n-1
d) The normality assumption of the regression are employed here. It suggests the the model is
linear, explanatory variables being exogenous, errors are independently and identically
distributed and population have normal distributed error term.

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