Nonlinear Relationships Prepared by Vera Tabakova, East Carolina University.

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Nonlinear Relationships Prepared by Vera Tabakova, East Carolina University

 7.1 Polynomials  7.2 Dummy Variables  7.3 Applying Dummy Variables  7.4 Interactions Between Continuous Variables  7.5 Log-Linear Models

7.1.1 Cost and Product Curves Figure 7.1 (a) Total cost curve and (b) total product curve

Figure 7.2 Average and marginal (a) cost curves and (b) product curves

If Deriv Exper < -β 3 /2β 4, or Exper > β 3 /2β 4.

Where is the ‘turning point’

Figure 7.3 An intercept dummy variable

Figure 7.4 (a) A slope dummy variable. (b) A slope and intercept dummy variable

Based on these regression results, we estimate  the location premium, for lots near the university, to be $27,453  the price per square foot to be $89.12 for houses near the university, and $76.12 for houses in other areas.  that houses depreciate $ per year  that a pool increases the value of a home by $  that a fireplace increases the value of a home by $

 Interactions Between Qualitative Factors

Remark: The usual F-test of a joint hypothesis relies on the assumptions MR1-MR6 of the linear regression model. Of particular relevance for testing the equivalence of two regressions is assumption MR3, that the variance of the error term is the same for all observations. If we are considering possibly different slopes and intercepts for parts of the data, it might also be true that the error variances are different in the two parts of the data. In such a case the usual F-test is not valid.

7.3.4a Seasonal Dummies 7.3.4b Annual Dummies 7.3.4c Regime Effects

7.5.1 Dummy Variables

Slide 6-36Principles of Econometrics, 3rd Edition

Slide 7-37Principles of Econometrics, 3rd Edition

Slide 7-40Principles of Econometrics, 3rd Edition  annual dummy variables  binary variable  Chow test  collinearity  dichotomous variable  dummy variable  dummy variable trap  exact collinearity  hedonic model  interaction variable  intercept dummy variable  log-linear models  nonlinear relationship  polynomial  reference group  regional dummy variable  seasonal dummy variables  slope dummy variable

Slide 7-41Principles of Econometrics, 3rd Edition

Slide 7-42Principles of Econometrics, 3rd Edition

Slide 7-43Principles of Econometrics, 3rd Edition

Slide 7-44Principles of Econometrics, 3rd Edition