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Econometrics 1123: Section 4 Handout Eunice Han [email protected] September 30th, 2010 1. The interaction between Independent Variables To allow the effect of X 1i on Y i to depend on X 2i , we can include the “interaction term” X 1i * X 2i as a regressor. Q1. Show that depends on X 1 = Q2. Plot the regression line of Y and X 2 , when X 1 = a and X 1 = b, where a<b. Assume that all the coefficients are positive. When X 1 = a, the regression line is When X 1 = b, the regression line is i i i i u X X Y 2 2 1 1 0 i i i i i i u X X X X Y ) * ( 2 1 3 2 2 1 1 0 i X Y 2 i X Y 2 i X 1 3 2 i i X a a Y 2 3 2 1 0 ) ( i i X b b Y 2 3 2 1 0 ) ( 1

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Econometrics 1123: Section 4 Handout

Eunice [email protected]

September 30th, 2010

1. The interaction between Independent Variables

To allow the effect of X1i on Yi to depend on X2i, we can include the interaction term X1i* X2i as a regressor.

Q1. Show that depends on X1= Q2. Plot the regression line of Y and X2, when X1 = a and X1 = b, where a

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