Statistics Research Paper based on a Regression Study Term

Statistics Research based on a Regression Study - Term Paper Example This paper seeks to investigate how household income levels influence prices. In particular, we are interested in investigating whether increases in average household earnings lead to higher costs of living. We use state wise data to explore the question. Given the nature of the data, the specific query that we seek to answer is: Does more affluent states tend to have relatively higher costs of living? The secondary questions are regarding the nature of dependence, i.e., is there a linear dependence or is there in fact a non-linear relationship among our variables of interest? In this section we discuss the basic economic theory that we intend to validate and then develop the hypothesis to test using the data. Economic theory establishes that other things remaining the same, higher income leads to higher demand. That is, if there is an increase in the income of the consumer, ceteris paribus, at each price the consumer will demand more of the good, provided it is not an inferior good (Varian, 2006). Now, given the market supply curve is fixed, such a rise in demand always results in higher prices for the good (Sullivan and Sheffrin, 2003). This is elaborated in the diagram below: In the diagram above, E1 is the initial equilibrium price. Now if there is an increase in income of the consumer, the quantity demanded at each price increases. As a result, the demand curve shifts from D1 to D2. Given the supply, curve remains unchanged, this results in the new equilibrium point E2. Clearly, the new equilibrium price P2 is higher than the initial price P1. Therefore, we find that higher incomes tend to boost up equilibrium prices. Extending this logic implies that localities where more affluent individuals reside should witness higher relative prices. This is because people with higher incomes will bid up prices of general merchandise and, thus, the cost of living could potentially be higher for such places. It is