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Use The Data in WAGE File To Estimate A Simple Regression Explaining Monthly Salary

The document describes estimating a simple linear regression model to explain monthly salary (wage) based on IQ score using data from a WAGE file. It finds that the average salary is $957.94 and average IQ is 101.28, with an IQ standard deviation of 15.05. A regression model is estimated and finds that for every 15 point increase in IQ, wage increases by $124.50. However, IQ only explains 9.4% of the variation in wages, so most of the variation is not explained by IQ alone. Multiple R-squared in the regression output represents the proportion of variance in the dependent variable that is explained by the independent variable.

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Liza Nagpal
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336 views4 pages

Use The Data in WAGE File To Estimate A Simple Regression Explaining Monthly Salary

The document describes estimating a simple linear regression model to explain monthly salary (wage) based on IQ score using data from a WAGE file. It finds that the average salary is $957.94 and average IQ is 101.28, with an IQ standard deviation of 15.05. A regression model is estimated and finds that for every 15 point increase in IQ, wage increases by $124.50. However, IQ only explains 9.4% of the variation in wages, so most of the variation is not explained by IQ alone. Multiple R-squared in the regression output represents the proportion of variance in the dependent variable that is explained by the independent variable.

Uploaded by

Liza Nagpal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Use the data in WAGE file to estimate a simple regression explaining monthly

salary (wage) in terms of IQ score (IQ).


Q.1 Find the average salary and average IQ in the sample. What is the standard deviation of IQ?
Ans-
 In the First step, Data sheet has been attached by the first 2 commands.
 The Average salary and the Avearge IQ will be calculated by putting the command of
Mean for both Wages and IQ.
 In the next step, Standard Deviation has been calculated for IQ by putting the command.

Commands Inserted in R-Studio

Result came in R-Studio


 The Average Salary of 935 people is 957.94.
 The Average IQ of 935 people is 101.28.
 The Standard Deviation of IQ is 15.05
Q.2 Estimate a simple regression model. Use this model to find the predicted increase in wage
for an increase in IQ of 15 points. Does IQ explain most of the variation in wage?
Ans- In the first step, Model has been formulated with the commands given below. After the
model formulation summary has been interpreted.

Commands Inserted in R-Studio

Result came in R-Studio


Simple Linear Regression Model

Wage=β1+ β2(IQ)
- Wage= Dependent
- IQ= Independent
- β1= Intercept
- β2= Slope

In the Result, we get Intercept=116.99 and slope = 8.30


Hence, the equation becomes Wage=116.99 + 8.30*(IQ)----1

In the question, it is asked that if the IQ will be increased by 15 points, Does IQ explain most of
the variation in wage. So for that second equation will be quoted.

Wage=116.99 + 8.30*(IQ+15)------2
After solving these both,
Wage= 8.30*15=124.5

Hence, an increase of IQ of 15 points will increase Wage by 124.5 points.


Also, after running the command for linear regression in r-studio, we get R2=0.094. Variation in
IQ explains only 9.4% of variation in Wage.
Therefore, variation in IQ doesn’t explain most of the variations in Wage.
Q.3 Explain the interpretation of Multiple R-square in the output.

Ans- R Square is known as the degree of determination. It helps to find the degree of level of
correlation between the independent and the dependent variable in the dataset that helps to
predict the dependent variable. R Squared is the ratio between the residual sum of squares and
the total sum of squares.

R Square is the ratio between the Sum of square explained (Regression) and the sum of square
total.
R square= SSE/SST

Graphical Representation of R Square


In this Graph, Wages and IQ are plotted along with the average of wages that is 957.94

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