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(Solved): (15pts) Consider the savings function sav=\beta _(0)+\beta _(1)inc+u,u=\sqrt(inc)*e where e is a ran ...
(15pts) Consider the savings function
sav=\beta _(0)+\beta _(1)inc+u,u=\sqrt(inc)*e
where e is a random variable with E(e)=0 and Var(e)=\sigma _(e)^(2). Assume that e is independent
of inc.
(i) Show that E(u|inc)=0e is independent of inc, then E(e|inc)=E(e).
(ii) Show that Var(u|inc)=\sigma _(e)^(2)*incVar(e|inc)=Var(e) if e and
inc are independent.