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Average hourly earnings in the U.S. retail trade industry (in current dollars and constant dollars) are shown in the table.

Year 1990 1995 2000 2002 2003
Current dollars 4.88 5.94 6.75 7.13 7.29
Constant dollars 5.70 5.39 5.07 5.00 4.97

a. Define the terms current dollars and constant dollars. You will have to look these terms up

b. Find the least squares regression line that approximates the average hourly earnings in both current dollars and constant dollars for this industry. Find the correlation coefficient in both cases. Comment on the meanings of the correlation coefficients.

c. Find where the two regression lines that you obtained in part b intersect. What does this point mean?

d. What are the slopes of the regression lines? What do they mean? (Use correct units.) What does this say about the long-term prospects of retail trade industry employees?

e. Use the regression lines to estimate the difference in current dollar and constant dollar hourly earnings in the year 2005.

f. Graph both of the regression lines on the same set of axes.

g. If you were a union negotiator for employees in the retail trade industry, how would you use this information?

#### Solution Preview

a.
The current dollar is the value of the dollar at today's price, without adjusting for the effect of inflation.
The constant dollar is the value of the dollar after adjusting for the effect of inflation. The constant dollar is used to compare the value of dollar from one year to another.

b.
Refer to the Excel file for the regression line. Excel has been used to plot the points given in the table and to compute the equation of the regression line. The equations of the regression lines computed by Excel are:
In current dollars: y = 0.1831x - 359.51
In constant dollars: y = -0.0575x + 120.03

The Excel file shows the computation for the Correlation coefficients.
In current dollars: Correlation coefficient = 0.9985
In constant dollars: Correlation ...

#### Solution Summary

Answered in 525 words. An Excel file with the graphs of the regression lines and computations is provided.

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