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# EC2017: Introductory Econometrics

Week 4 Exercises
[Open the Confidence Interval Calculator Excel file on moodle. The
default data is exactly the one used in the exercise below. I think you
should use these two teaching aids in conjunction.)
Consider the following dt on !ge "left column# nd Wge "right column# "used in the first week of
lectures#
!ge "x# Wge "y#
21 150
25 230
31 356
17 103
24 500
\$ou now h%e estimted the model yi & + xi+ i 'y fitting the line y
e
& ('x & )1*1+,-
( 1*+4-x using ./0
i+ 1ind 2
2
nd 2esidul 0um of 03ures "200#
TSS = (y- )
2
= 104160.8
ESS = b
2
(x- )
2
= 19.!
2
"107.2 =#!1.\$
So %SS = 63546.07
R
2
=#!1.\$&104160.8=0.3899
ii+ In%oke the ssum4tions of the C/25 to find the following:
"# # 1or x & 2,6 clculte 4oint estimte of the 4redictor for the corres4onding y+
y
e
= -191.56+19.46*25 = 294.94 is the point estimate of the predictor
"'# Wht is the distri'ution of the estimtor used in 4rt "# 'o%e7
Since y
e
= a + bx !"y
e
# = !"a# + x*!"b# for any \$i%en %a&'e of x. So
!"y
e
# = !"a# + x*!"b# = + x = !"y# beca'se both a and b are 'nbiased estimators.
(&so since both a and b ha%e norma& distrib'tions and y
e
is a &inear f'nction of a and b
y
e
has a norma& distrib'tion as )e&& )ith %ariance % \$i%en by
%
2
* "1+n# + "x2, - x2-!(.#
2
+(x2i - x2-!(. #
2
/
21102.,2*"1+5# + "25-21.6#
2
+1,2.2/ = 4621.69
3
[.ote4 5ere remember that as disc'ssed in the &ect'res x is the same as x2 and
x2-!(. = ' so that x2, = 25 is the ne)&y ac6'ired %a&'e of x for )hich the act'a& y
is 21, as per the data \$i%en./
7h's "y
e
8 !"y##+ "4621.69#
1+2
has a t-distrib'tion )ith 1 de\$rees of freedom
"c# 8se the distri'ution in 4rt "'# to clculte the *,9 confidence inter%l for this
4rediction+
Since "y
e
8!" y##+ "4621.69#
1+2
has a t-distrib'tion )ith 1 de\$rees of freedom and the
959 %a&'es for t1 are 1.1024 the 959 confidence inter%a& for the predictor is =
*294.94 - 60*1.1024 294.94+60*1.1024/ = *20.54 511.14/
"d# Wht is the error of 4rediction nd its distri'ution for the gi%en %lue of x & 2,7
Wht is the *,9 confidence inter%l for the error of 4rediction7
7he prediction error p = y- y
e
is norma&&y distrib'ted beca'se both y
e
and y are. (&so p
c&ear&y has :ero mean "pro%ed in the &ect'res#. 7he %ariance of p is \$i%en by
%
2
* 1+ "1+n# + "x2, - x2-!(.#
2
+(x2i - x2-!(. #
2
/ 250,5.2. 7herefore p+"250,5.2
#
1+2
has a t distrib'tion )ith 1 de\$rees of freedom.
Since p+"250,5.2#
1+2
has a t distrib'tion )ith 1 de\$rees of freedom and the re&e%ant t
%a&'es are 1.1024 )e can )or; o't the 959 confidence inter%a& of p as 1.1024*
"250,5.2#
1+2
or 511.226

:y4othesis ;esting:
"# ;est "t ,9 significnce# the hy4othesis tht the 4o4ultion regression line 4sses
through the origin+
5,4 = ,< 514 ,. =onstr'ct t = -191.56+ 110.,652 ,.52 > critica& t = 1.1024"at
59 t)o-tai&# . So do not re?ect 5, and retain the hypothesis that the &ine passes thro'\$h
ori\$in.
"'#;est "t ,9 significnce# the hy4othesis tht the slo4e coefficient is <ero+
5,4 = ,< 514 ,. =onstr'ct t = 19.46+14.,6 1.10 > critica& t = 1.1024. So do not
re?ect 5, and retain the hypothesis that the s&ope coefficient is :ero the mode& has no
exp&anatory po)er.
"'# ( priori resercher 'elie%es tht the slo4e coefficient is negti%e num'er+ :ow do
they construct hy4othesis test to %erify this7 [:int: drw digrm for the t)
distri'ution#
5,4 = ,< 514 > ,. =onstr'ct t = 19.46+14.,6 1.10 t @ -2.15 "at 59 one-tai&#. So do
not re?ect 5, and retain the hypothesis that the s&ope coefficient is :ero not ne\$ati%e.
.-.!" .#.!\$
t=
%