EXAMPLE 10.1 Prediction of Log Income from Education Level

CASE 10.1 The green line in Figure 10.4 is the least-squares regression line for predicting log income from years of formal schooling. The equation of this line is

We can use the least-squares regression equation to find the predicted log income corresponding to a given value of EDUC. The difference between the observed and predicted value is the residual. For example, Entrepreneur 4 has 15 years of formal schooling and a log income of 10.2274. We predict that this person will have a log income of

so the residual is