Example 10.12

EXAMPLE 10.12 ANOVA for Entrepreneurs’ Log Income

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CASE 10.1 Figure 10.18 repeats Figure 10.5. It is the Excel output for the regression of log income on years of education (Case 10.1). The three terms in the analysis of variance equation appear under the “SS” heading. SS stands for sum of squares, reflecting the fact that each of the three terms is a sum of squared quantities. You can read the output as follows:

sum of squares

Figure 10.18: FIGURE 10.18 Excel output for the regression of log annual income on years of education, Example 10.12. We now concentrate on the analysis of variance part of the output.

522

The proportion of variation in log incomes explained by regressing years of education is

This agrees with the “R Square” value in the output. Only about 6% of the variation in log incomes is explained by the linear relationship between log income and years of education. The rest is variation in log incomes among entrepreneurs with similar levels of education.