Relationship between annual expenditure on prepared dinners (PD) and annual income (INC)

1. Imagine that you have come across a magazine article reporting the following relationship between annual expenditure on prepared dinners (PD) and annual income (INC):

PD = 23.4 + 0.003 INC

The coefficient of the INC variable is reported as significant. a. Does this relationship seem plausible? Is it possible to have a coefficient that is small in magnitude and yet significant?

b. From the information given, can you tell how good the estimated model is?

c. What are the expected expenditures on PDs of a family earning $30,000?

d. If a family earning $40,000 spent $130 annually on PDs, what is the residual?

e. What is the meaning of a negative residual?

Solution: