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Suppose you estimate the consumption, Yi =
a1 + a2Xi + U1i

And the savings fuctions: Zi = B1 +
B2Xi + U2i
Where Y = consumption, Z = income and X = Y + Z, that is, icoe is
equal to consumptiom plus savings.

a) what is the resltionship, if any, between a2 and
B2? Show your calculations.

b) Will the resdual sum of squares, RSS, be the same for the two
models? Please explain.

c) Can you compare the R2 terms of the two models?
Why or why not?

d) Explain the assumptions that must underlie the behaviour of
U1i to ensure valid statistical inference.

e) Explain the Gauss Markov Theorem