Introduction to econometrics II eco 356 faculty of social sciences course guide course Developers: Dr. Adesina-Uthman

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Introduction to Econometrics ECO 356 Course Guide and Course Material

2.5.3.3 Slope Dummy Variables
INTRODUCTION TO ECONOMETRICS II ECO 306 NOUN

INTRODUCTION TO ECONOMETRICS II

ECO 306

NOUN
94 now the reference category, we need a dummy variable, which will be called GEN, for the general academic schools. The model becomes
…[2.81] where are the extra costs of technical, vocational, and general schools relative to skilled workers schools.
2.5.3.3 Slope Dummy Variables
We have so far assumed that the qualitative variables we have introduced into the regression model are responsible only for shifts in the intercept of the regression line. We have implicitly assumed that the slope of the regression line is the same for each category of the qualitative variables. This is not necessarily a plausible assumption, and we will now see how to relax it, and test it, using the device known as a slope dummy variable (also sometimes known as an interactive dummy variable. The assumption that the marginal cost per student is the same for occupational and regular schools is unrealistic. Because occupational schools incur expenditure on training materials related to the number of students, and the staff-student ratio has to be higher in occupational schools because workshop groups cannot be, or at least should not be, as large as academic classes. We can relax the assumption by introducing the slope dummy variable, NOCC, defined as the product of N and OCC:
…[2.82] If this is rewritten
(
)
…[2.83] it can be seen that the effect of the slope dummy variable is to allow the coefficient of
N
for occupational schools to be greater than that for regular schools. If OCC is 0, so is
NOCC and the equation becomes
…[2.84] If OCC is 1, NOCC is equal to N and the equation becomes

INTRODUCTION TO ECONOMETRICS II

ECO 306

NOUN
95
(
)
…[2.85] is thus the incremental marginal cost associated with occupational schools, in the same way that is the incremental overhead cost associated with them.

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