interac

Question 1

What kinds of interactions do we have

Answer 1

1. interactions between dummy variables
2. interaction between binary and continuous
3. interaction between two continuous

Question 2

dummy trap is what

Answer 2

• dummy trap happens when the number of dummy variables created is equal to the number of values the categorical value can take on.
• Dummy a numeric value that categorizes a variable, gender, age etc.
• categoric variables minus 1 dummy allowed
• leads to multicorr

Question 3

dummy trap is what

Answer 3

• The dummy trap occurs when –> N of D = N of Categoric values
• remove one of the dummies to get rid of the problem
• a dummy represent a categorical variabel such as gender, age etc
• perfect multicorr

Question 4

interaction dummy and continuous

Answer 4

• if we have one regressor and one dummy variable and no interaction term, the slope will only be a product og B1 * X, while the intercept will either be B0 or B0+B2.
• If we create a new term B3(X * D) we allow for the figure to have different intercept or slope or both, depending on the estimated values.

Question 5

interaction two continious

Answer 5

• If we have to betas with each their X, we can create an extra term: B3(x1 * x2)
• we now allow the effect of one unit change in x1 to depend on one unit change in x2

Question 6

What is a general strategy for modelling a nonlinear function

Answer 6

1.use your economic knowledge
2.estimate a regression using OLS
3. test if non-linear is better than linear. Can be done by t-stat and f-stat
4-plot the nonlinear function. Does the regressor describe the data well? Does the regression fit the scatterplot?
5.estimate effect on Y of a change in x

Question 7

What is polynomials

Answer 7

Polynomials is made by having x with powers. Most usually 2, 3 or 4 powers. A power of 2 makes a quadratic function while power of 3 makes a cubic function. The amount of degrees/powers can be denoted as r. r degrees gives r-1 bends.