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Summer 2013

ECON 335 – Homework 2 – 75 points Basic Statistics and CLRM – KEY 1. Suppose you collected data on the average number of text messages sent per month by 300 randomly selected teenagers over 2009 and 2010 and found the sample mean � = ∑300 � (𝑌 𝑖 ⁄𝑁 )) was 3,339 text messages with an estimated standard error of 𝑆𝐸 (𝑌) = 𝑖=1(𝑌

� 𝜎

√𝑁

= 250. Assume that the population data are normally distributed. monthly teenager text messaging using your sample.

a) Provide an estimate of the mean and the variance of the population distribution of

� is our best estimate of the population mean, while the population variance is estimated, 𝑌 � ) and using the definition of standard error (the standard deviation of the estimator, 𝑌 𝑁(3339, 1.875 × 107 ). here, by 𝜎 � 2 = (250 ∙ √𝑁 )2 = (250 ∙ √300)2 ≈ 1.875 × 107 . Note that we get this by solving for 𝜎 � 2 . So we estimate that the population is approximately normally distributed b) Using the distribution you calculated in a), compute the probability that any teenager will send more than 5,500 text messages. By drawing the picture below, we see that we are looking for the area to the right of 5500

Y 3339 5500 1

656 ≤ 𝑍 ≤ −. we need to transform the 𝑁(3339. 1.000 and 500 text messages per month? This is the same sort of calculation as in part (b).13 We can calculate this area as ≈ 𝑃 (𝑍 ≤ −.85%.2946 − . To find this. We’re looking to find 𝑃(500 ≤ 𝑌 ≤ 1000) ≈ 𝑃 � = 𝑃 � 500 − 𝜇𝑌 𝑌 − 𝜇𝑌 1000 − 𝜇𝑌 � ≤ ≤ 𝜎𝑌 𝜎𝑌 𝜎𝑌 � 1000 − 3339 500 − 3339 𝑌 − 𝑌 ≤ ≤ � = 𝑃(−. d) How many text messages per month is associated with the top 10% of all teenagers? So.540) 𝜎 �𝑌 4330.50) ≥ 𝜎𝑌 4330.50) = 1 − 𝑃(𝑍 ≤ .656) ≈ . we are looking for the value of c such that 𝑃(𝑌 ≤ 𝑐 ) = 0.KEY Summer 2013 Note that we want to use the estimates of the population parameters to calculate an area under that distribution.2546 ≈ .875 × 107 ) distribution into one we follows � � 5500 − 𝑌 𝑌 − 𝜇𝑌 5500 − 𝜇𝑌 𝑌 − 𝑌 � = 𝑃 � � ≥ ≥ 𝜎𝑌 𝜎𝑌 𝜎 �𝑌 𝜎 �𝑌 know about … namely.13 c) Approximately what proportion of teenagers send between 1.3085 𝑌 − 𝜇𝑌 5500 − 3339 � ≈ 𝑃(𝑍 ≥ . 1).13 4330. ≈ 1 − .90. so we use our estimate of the population mean and variance as follows: 2 . approximately 30. NOT perform a hypothesis test on the mean. Again. We make this transformation as 𝑃 (𝑌 ≥ 5500) ≈ 𝑃 � = 𝑃 � Or.540) − 𝑃(𝑍 ≤ −. or 𝑁(0. As such this is only an estimate as well.6915 ≈ . a standard normal. we are not testing the hypothesis about the population parameter.04 or approximately 4%.

we want to find the critical t-stats that give us . Here’s where we get into inference.95 3 . Note this is � − 𝜇𝑌 𝑌 ~ 𝑡(𝑁−1) 𝜎 �𝑌 � √𝑁 approximately the same critical values we would obtain from the standard normal distribution.13 ≈ 1. Since we are using an estimate of the population � to a t-distribution. we obtain 𝑐 ≈ 8924. and provide an interpretation.13 The critical value for which 90% of the density of a standard normal variable lies to the left is about 1. Solving for c. Again.025 of the probability mass in the two tails.90 𝑃(𝑌 ≤ 𝑐 ) = 0. These t-stats for 𝑡(299) are ±1.e.96 . about 10% of teenagers send more than 8925 texts per month.KEY Summer 2013 � 𝑐 − 𝑌 � 𝑌 − 𝑌 𝑐 − 3339 � = 0.87. however this is only because our number of observations here are large (if we had a smaller number of observations the appropriate number of degrees of freedom. we’ll transform 𝑌 𝑡 = For a 95% confidence interval.95 ≤ 1. we obtain 𝑃[2849 ≤ 𝜇𝑌 ≤ 3829] = .29. So 4330. 𝑐−3339 e) Provide the 95% confidence interval for the mean number of text messages per month.90 → 𝑃 �𝑍 ≤ 𝜎 �𝑌 𝜎 �𝑌 4330.29. Thus. i.90 → 𝑃𝑟 � ≤ � = 0. note the form of these questions (a)-(d). would be needed to obtain the correct critical value) 3339−𝜇𝑌 250 Our 95% confidence interval thus implies 𝑃 �−1.96� = . we are asking about probabilities related to the distribution of the population … NOT about inferences (drawing conclusions about the population parameter from the sample data) relating to the mean. n-1. variance.96 ≤ Solving.

356. Here we test 𝐻0 : 𝜇𝑌 = 2500 against the alternative 𝐻𝐴 : 𝜇𝑌 ≠ 2500 . so we REJECT the null hypothesis. and clearly 1. In other words. tail of the distribution only.500. This is now a one tailed test. being sure to write down the null and alternative hypotheses. g) Repeat part f).e. and provide a conclusion.64<3. We are 95% certain that this interval contains the true mean. indicate the rejection region. f) Test the null hypothesis that the mean number of text messages per month sent by teenagers is 2. Again. 3829). Our test statistic (under the null hypothesis that 𝜇𝑌 = 2500) is 𝑡 = � − 𝜇𝑌 3339 − 2500 𝑌 = = 3. with 𝐻0 : 𝜇𝑌 ≤2500 against the alternative 𝐻𝐴 : 𝜇𝑌 > 2500. Large t-stat values give us evidence in favor of the alternative. we have enough evidence to conclude that the mean number of texts is different than 2500.96<3. 1.356 ~ 𝑡(299) 𝜎 �𝑌 250 � √𝑁 The critical t-values. we have enough evidence to reject the null in favor of the alternative. the test statistic. This is consistent with our interval estimate … 2500 does NOT lie in the estimated interval with 95% confidence. Our t-stat lies in the right tail of the rejection region. so we would reject the null hypothesis.500 at the 5% level of significance using a two-tailed test. The critical t-value is 1. 4 The test statistic is the same … but now the rejection region becomes the right side of the . i. but now test the alternative hypothesis that the mean number of text messages sent by teenagers per month is greater than 2.64.356. which define the rejection region are ± 1.KEY Summer 2013 Thus. so we REJECT the null hypothesis in favor of the alternative. the interval estimate for the mean number of texts per month by teenagers is (2849.96 .

d. which is random since it is a linear function of the random variable u. Identify the error term in this model. It is observable. Are they random? If so. how is it distributed (what is the mean and variance)? Is it observable or not? The dependent variable is Y. Is it random? If so. assumptions of the CLRM discussed in the lecture notes to answer the following questions) Consider a CLRM of the form 𝑌𝑖 = 𝛽1 + 𝛽2 𝑋𝑖 + 𝑢𝑖 where 𝑢𝑖 ~ 𝑁(0.𝑢𝑖 is random. distributed 𝑢𝑖 ~ 𝑁(0. how are they distributed (what is the mean and variance)? Is it observable or not? The parameters are 𝛽1 and 𝛽2 which. 5 . It is distributed 𝑌𝑖 ~ 𝑁(𝛽1 + 𝛽2 𝑋𝑖 . Identify the parameters of this model. Identify the independent variable in this model. 𝜎 2 ). 𝜎 2 ) which can be shown by taking the expectation and variance of Y.KEY Summer 2013 2. are non-random and not observable. unknown population parameters. (Use the a. BE SURE you understand this! c. how is it distributed (what is the mean and variance)? Is it observable or not? The independent variable is X. being true. how is it distributed (what is the mean and variance)? Is it observable or not? The error term. Is it random? If so. which is fixed in repeated samples and thus nonrandom. Identify the dependent variable in this model. 𝜎 2 ) and unobservable since the underlying population parameters are unobservable. Is it random? If so. as it is part of the data. b.

2 � 𝑋𝑖 � 𝑌𝑖 5 12 � ? What is 𝑌 �? a. 𝑏1 is our estimated intercept coefficient and can be calculated as follows and means that the mean of Y will be equal to 1. What is 𝑋 �= 𝑋 ∑ 𝑋𝑖 5 ∑ 𝑌𝑖 12 �= = = 1 𝑎𝑛𝑑 𝑌 = = 2.4 0 0. � − 𝑏2 𝑋 � = 2.2 � )2 ∑ 𝑥𝑖2 ∑(𝑋𝑖 − 𝑋 10 6 .6 -0.4 1. Complete the above table. As we have seen and will continue to see. Calculate 𝑏1 and 𝑏2 from this chart and provide an interpretation of each.4 -4. often this literal interpretation of the intercept term has no real economic importance.2(1) = 1.4 � 𝑦𝑖 0 𝒙𝒊 𝒚𝒊 -0.4 � 𝑥𝑖 𝑦𝑖 12 2(3.2 unit change in Y. putting the sums in the last row.8 4.4 𝑛 𝑛 5 5 b. Consider the following data.2 when the value of X is zero.2 𝑏1 = 𝑌 𝑏2 = � )(𝑌𝑖 − 𝑌 � ) 12 ∑ 𝑥𝑖 𝑦𝑖 ∑(𝑋𝑖 − 𝑋 = = = 1.4 − 1. 𝑏2 is our estimated slope coefficient and can be calculated as follows and means that a one unit change in X will lead to a 1.KEY Summer 2013 3. where all summations are over the index i: 𝑿𝒊 3 2 1 -1 0 𝒀𝒊 6 2 4 2 -2 � ) 𝒙𝒊 𝟐 = (𝑿𝒊 − 𝑿 � )𝟐 𝒚𝒊 = (𝒀𝒊 − 𝒀 �) 𝒙𝒊 = (𝑿𝒊 − 𝑿 3-1=2 1 0 -2 -1 � 𝑥𝑖 0 22=4 1 0 4 1 � 𝑥𝑖2 10 6-2.4=3.6 -0.6)=7.

2 1.KEY Summer 2013 c.6 -2 0 � 𝑋𝑖 𝑒𝑖 0 1.22=1. putting the sums in the last row.2(3)=4. 𝑌 � = 1.4 = 𝑌 𝑛 5 7 . that the least squares residuals sum to zero.4 = 𝑌 � 𝑌 � 𝑖 ∑ 𝑌 𝑛 e.2 �𝑖 � 𝑌 12 -1. � � = 𝑏1 + 𝑏2 𝑋 d.E.8 6-4.8=1.4 0 1. and Note that the average prediction is 𝑌 that the sum of the independent variable times the least squares residual is also zero.2+1.44 3(1.6 2 -3. Compute 𝜎 � 2 (Note: This is the S.6 2.8 � . of the regression squared) 𝜎 �2 = ∑ 𝑒𝑖2 20. Use your results from b) to complete the following table.6 1. Show that for this problem.9333 𝑛 − 2 3 �𝑖 12 ∑ 𝑌 � = = 2.8 = ≅ 6.2 � 𝑒𝑖 0 2.56 2.56 4 10.2(1) = 2.2 + 1. Show that for this problem. 𝑿𝒊 3 2 1 -1 0 � 𝑋𝑖 5 𝒀𝒊 6 2 4 2 -2 � 𝑌𝑖 12 �𝒊 𝒀 𝒆𝒊 𝒆𝟐 𝒊 𝑿𝒊 𝒆𝒊 -3.24 � 𝑒𝑖2 20.2)=3. These are not coincidence…they are properties that arise from the CLRM.2 1. � = 𝑌 f.6 3.

4)2 + (2 − 2.409 𝑇𝑆𝑆 35.8.2 𝑅2 = 1 − 𝑅𝑆𝑆 20. However. we need to know that 𝑅𝑆𝑆 = ∑ 𝑒𝑖2 = 20.2 So. we need to calculate 𝑇𝑆𝑆 = ∑ 𝑦𝑖2 = ∑(𝑌𝑖 − 𝑌 �) � 𝑦𝑖2 = �(𝑌𝑖 − 𝑌 2 = (6 − 2. Provide an interpretation of First. 𝑅𝑆𝑆 𝑇𝑆𝑆 . 𝑅2 = 1 − your result. Compute the R2 for this regression.4)2 = 35. we calculated this in part (c).4)2 + (−2 − 2.8 =1− = 0. therefore This means that approximately 41% of the variation in Y is explained by the independent variable X.4)2 + (2 − 2. Recall. � )2 .4)2 + (4 − 2. 8 .KEY Summer 2013 e.

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