## Interview Question: Dummies in an Equation

Sample Question #100 (econometrics)

What’s wrong with the following model which tries to study the "happiness measure" (the y variable) of the American population?

y = α + β1I{income<\$35,000} + β2I{income>=\$35,000} + β3x + ε

where I{ } is the indicator function, i.e., it’s 1 if the condition in the braces {} is true and 0 otherwise. x is a continuous exogenous variable that’s independent of income.

(Updated comment: A few visitors to my blog have complained that since not everyone knows econometrics, it would be "very" unfair to ask a question that many people simply are not familiar with. Okay, the little "contest" I had in mind was meant to be fun [like it was duly noted in the previous comments], but I see these guys have a point. So, sorry, no more contest. I apologize for the snafu.  I hope you enjoy this question if you know statistics and/or econometrics. Cheers! 7 pm EDT 8/21/07)

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### 3 Responses to Interview Question: Dummies in an Equation

1. Zhe says:

may i ask what x stand for? thx

2. Brett says:

x is just some arbitrary independent variable.

3. Brett says: