Question

2. (10) A sample of 200 Chicago households was taken to investigate how far American households tend to travel when they take vacation. Measuring distance in miles per year, the following model was estimated MILES =B1 + B2INCOME + B3AGE + B.KIDS +e The variables are self-explanatory except perhaps for AGE, the average age of the adult members of the household. The data are in the file vacation.dta. a) The equation was estimated by least squares and the residuals are plotted against age and income in the figures below. What do these graphs suggest to you?

Answer 1

in both the graphs we can see that the the residual is roughly concentrated around 0. there is no visible trend (increasing or decreasing). this tells us that as we change the income, it will not affect the residuals. similarly for the second graph, as we change the age, it will not affect the residuals. this clearly tells us that the residuals are uncorrelated to the stochastic variables.