1. Consider the following fitted model

LGEARNˆ     = 1.31 + 0.08S + 0.02EXP + 0.001SEXP,         R² = 0.139,

(0.33)  (0.02)     (0.04)          (0.003)

where the standard errors of parameter estimates are in brackets, LGEARN denotes the natural logarithm of hourly earnings measured in US $, S denotes number of years schooling, EXP denotes number of years work experience, and SEXP is the product of S and EXP. There are 500 observations.

• Interpret the coefficients 0.08 and 0.001, and perform a t test to argue if SEXP should be included in the model. [15 marks]
• Suppose one individual receives 13 years of schooling, and has 10 years work experience. What is the expected change in this person’s hourly earnings if this individual has one extra year’s work experience? [10 marks]