[women] are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in their income," that is, the marginal propensity to consume (MPC) is greater than zero but less than one. Although Keynes did not specify the exact functional form of the relationship between consumption and income, for simplicity assume that the relationship is linear as in (2.4.2). As a test of the Keynesian consumption function, we use the sample data of Table 2.4, which for convenience is reproduced as Table 3.2. The raw data required to obtain the estimates of the regression coefficients, their standard errors, etc., are given in Table 3.3. From these raw data, the following calculations are obtained, and the reader is advised to check them.
r2 = 0.9621 r = 0.9809 df = 8 The estimated regression line therefore is
which is shown geometrically as Figure 3.12.
Following Chapter 2, the SRF [Eq. (3.6.2)] and the associated regression line are interpreted as follows: Each point on the regression line gives an estimate of the expected or mean value of Y corresponding to the chosen X value; that is, Yi is an estimate of E(Y | Xi). The value of p2 = 0.5091, which measures the slope of the line, shows that, within the sample range of X between $80 and $260 per week, as X increases, say, by $1, the estimated increase in the mean or average weekly consumption expenditure amounts to about 51 cents. The value of p1 = 24.4545, which is the intercept of the
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