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In Economics, when the nature of the association between the dependent and independent variable is of the type that the change in the dependent variable is likely to be less than the change in the independent variable, then in order to estimate such type of the relationship, we consider the following consumption spending model in which consumption spending depends on some autonomous consumption and income:
Where Y represents consumption spending, β0 shows autonomous consumption, X indicates income and β1 is the estimated effect of income on consumption. As equation (1) is a non-linear equation and we want to estimate this equation through OLS method of estimation. Comment on the transformation which is required to make this model linear and also mention the name of functional form which is obtained after applying the transformation. After estimation, how we can interpret the estimated parameters?
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