Suppose the following is the true population model of the effect of Return on Assets (ROA) on CEO salary: Annual CEO Salary = β0 + β1Annual ROA + u. Further, suppose that the sample average CEO Salary is $525,000 and the sample average Annual ROA is 10% (assume that in your data Annual ROA is reported in percent form, not in decimal form). Finally, suppose your estimate of β0 is 230,000.
(a) What must your OLS estimate of β1be? Show your calculations.
(b) If Richard Smith, the CEO of XYZ Inc. has earned an annual salary of $800,000 this year and XYZ Inc’s ROA is 12% this year what is the value of u for Richard Smith?