thumbs/Econ_3120_Lecture_16.png
Start mastering your classes. Access 3M+ class-specific study documents.

The Linear Probability Model (1 pages)

Previewing page 1 View the full content.
View Full Document

Previewing page 1

View the full content.
View Full Document
View Full Document

The Linear Probability Model

600 views

Lecture 16


Lecture number:
16
Pages:
1
Type:
Lecture Note
School:
Cornell University
Course:
Econ 3120 - Applied Econometrics
Edition:
1

Unformatted text preview:

Econ 3120 1st Edition Lecture 16 Outline of Current Lecture I. Dummy Variables Current Lecture II. The Linear Probability Model The Linear Probability Model What if y is a binary variable? For example, consider the chlorine experiment in Zambia discussed earlier. Single bottles were sold to households at random prices ranging from 300-800 Kwacha. We want to measure the effect of price on purchase. We can run the OLS regression purchasei = β0 +β1 pricei +ui How do we interpret β1 in this case? Here, E(purchase|price) = P(purchase = 1|price). That is, the expectation is equivalent to the probability that the dependent variable equals 1. Now, 4 let’s look at the CEF: E(purchase|price) = β0 +β1 price P(purchase = 1|price) = β0 +β1 price Differentiating with respect to price yields ∂P(purchase = 1|price) ∂ price = β1 Thus, β1 can be interpreted as the change in purchase probability associated with a 1-unit change in price. When price is measured in hundreds of Kwacha, we get: P(Purchased= 1|price) = 0.96 (0.052) − 0.066 (0.0093) price Exercises: Can we rule out the prediction that everyone would have accepted a free distribution? At what price do we predict zero purchase? 5 These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.



View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...

Login

Join to view The Linear Probability Model and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?

Sign Up

Join to view The Linear Probability Model and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?