Considerthe following model to explain monthly beer consumption:

beeri = β0 + β1 incomei + β2 pricei + β3 educationi + β4 femalei + εi

where the expected value of εiis zero, but the variance of εi is equal to σ2 incomei2.


A)
Whatis the name of the specification problem in this problem?





B)
Giventhe form of the variance listed above, it turns out to be the case that εiis equal to incomei times ui, where ui is a normally distributederror term with constant variance.
(Hooray!)
Armed with this exitinginformation, transform the original model into a model that has a nice,normally distributed error term with constant variance, while still givingestimates for the same betas.




C)
Describe another option (aside from the one in part B) for dealing withthe specification problem in the original equation.