A researcher has data on the aggregate expenditure on servic

A researcher has data on the aggregate expenditure on services, Y, and aggregate disposable personal income, X, (both measured in billion of dollars at constant prices), for each of the US states and fits the equation Yi = beta 0 +beta Xi +u1 The researcher initially fits the equation using OLS regression analysis. However, suspecting that tax evasion causes both Y and X to be substantially underestimated, the researcher adopts two alternative methods of compensating for the under-reporting. For each of the methods below evaluate the impact of the adjustments on the regression results (on beta 0 and beta 1) The researcher adds $50 billion to the data for Y in each state and $100 billion to the data for AT. The researcher increases the figures for both Y and X in each state by 10 percent.

Solution