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Misung Ahn

(a) From the STATA results below,

lnP

-0.160

(0.022)

lnY

1.692

(0.070)

Intercept

-9.899

(0.626)

N

R

27

0.981

F (2,24)

616.39

(b) Notice that the dependent variable and independent variables are transformed to the logratithm

function. Mathematically,

1 = log(Gt )/log(Pt )

and

2 = log(Gt )/log(Pt ).

Therefore,

mea-

sures the percentage change in the gas consumption with respect to the percentage change in the

gasoline price; that is, the price elasticity of gasoline. On the other hand,

change in the gas consumption with respect to the percentage change in income; that is, the income

elasticity of gasoline.

(c)

Ho : 1 = 0

vs

H1 : 1 > 0

t statistic =

Please

0.1604

0.1604 0

=

= 7.30 tdf =273=24

0.0220

SE(1 )

1

Since the critical value of the one-sided test at the 5% level for

which gives the

p value 0.000,

t24

we may reject the null hypothesis at the 5% level and conclude that

(d)

Ho : 2 = 1 vs H1 : 2 6= 1

t statistic =

1.6917 1

0.6917

=

= 9.839 tdf =273=24

0.0703

SE(2 )

This is the two-sided test which gives the critical value of 2.064 for

2.064,

tdf =24

at 5% level. Since

|9.839| >

we may reject the null hypothesis and conclude that the gasoline demand is not unitary income

elastic.

(e) From the following STATA results,

ln(Gt )

+0.7775P Et + 1.0807P Et ln(Pt ) 0.1010P Et ln(Yt ) + Ut

lnP

-0.143

(0.025)

lnY

1.205

(0.171)

PE

0.778

(2.462)

PElnP

1.081

(0.408)

PElnY

-0.101

(0.274)

Intercept

-5.440

(1.549)

N

R

27

0.991

F (5,21)

(f )

444.968

F T est

If the gasoline demand was unaected by the Arab Oil Embargo of 1973,

the dummy variable

P Et

3 = 4 = 5 = 0.

log(Gt ).

It is when

This is equivalent

af ter 1973 : log(Gt )

Notice that only when

(0 + 3 ) + (1 + 4 )log(Pt ) + (2 + 5 )log(Yt ) + Ut

= 0 + 1 log(Pt ) + 2 log(Yt ) + Vt

3 = 4 = 5 = 0,

(1)

(2)

Ho : 3 = 4 = 5 = 0 vs H1 : not H0

2

not Ho

for

i 3, 4, 5

are not zero but equal; all are not zero nor equal or etc. In order to conduct the

is not 0; or all

F test,

we consider

Unrestricted:

Restricted:

For the restricted model, we use Table 1. There are three restrictions(q

in class, this

= 3) in this test.

counts the number of equal signs but not the number of coecients in

As we learned

H0 .

Although the SSRs are not shown in Table 1 and 2, I used SSR from the STATA output.

test statistic =

(0.0266 0.0130)/3

=

7.3231 F(3,21)

SSRu /(27 6)

0.0130/21

SOLUTION 2 USING R :

2

test statistic =

2

)/3

(Ru2 RR

(0.9906 0.9809)/3

=

7.2234 F(3,21)

(1 Ru2 )/(27 6)

(1 0.9906)/21

F(3,21)

(g) Lagrange multiplier Test

To run the auxiliary regression, we compute the

Vt ,

This is obtained by a STATA command predict resid, residuals following reg lnG lnP lnY in STATA.

Then we run the auxiliary regression of reg resid lnP lnY PE PElnP PElnY and get

0.5103 in this problem.

lnP

0.018

(0.025)

lnY

-0.487

(0.171)

PE

0.778

(2.462)

PElnP

1.081

(0.408)

PElnY

-0.101

(0.274)

Intercept

4.459

(1.549)

N

R

27

0.51

F (5,21)

4.378

Ru2 ,

which is

The critical value at 5% level for

2df =3

3 = 4 = 5 = 0.

(h)

Before the embargo, the estimated price elasticity of demand is

as shown in equation (1). After the embargo, it is

1 = 0.1427

as in equation (2).

On the other hand, the estimated income elasticity of demand before the embargo is

2 = 1.2048

2 + 5 =

(2).

(i)

Notice that the price elasticity of gasoline demand used to be 0.9380, which is positive, surprisingly, and

then it is altered to -0.1427. To see if it is a statistically signicant change,

From STATA results corresponding to Table 2, we see that

Ho : 4 = 0 vs H1 : 4 6= 0.

t value = 2.65

Thus, we reject the null at the 5% level. Prior to the Embargo, the price elasticity used to be positive.

Considering that the price elasticity is mostly negative except for giens, one explanation to this

unintuitive results is the demand shifts.

Before the Embargo where the gasoline price was low and

stable, people could have aorded a large car, which demands more gasoline. Hence, the price elasticity

results in a positive number; that is, the gasoline demand increases with respect to the price increase.

After the Embargo, people would substitute their larger cars towards smaller cars and this will give

the usual negative price elasticity where higher gasoline price yields lower gasoline demand. Thus,

we can say that the demand became more sensitive to changes in price.

On the other hand, the income elasticity became higher in (h). It remains to be positive; the more

income one has, the more s/he demands the gasoline. Thus, the gasoline demand became more sensitive

to income. The analogous argument with car sizes goes through for the income elasticity.

(2) F-test

The unrestricted regression model:

(a)

Ho : 0 + c1 = 0

So we will use

after imposing

0 = c1 .

is the number of equal signs in the hypothesis, we know there is only 1 restriction. Then, the relevant

F-distribution is

F(1,N 5) .

Ho : 2 = 3 = 4

(b)

(c)

after imposing

2 = 3 = 4 .

F(2,N 5) .

Ho : 1 + 2 + d3 + e4 = 1

1 = 1 2 d3 e4

F-distribution is

Yn Xn1 =

F(1,N 5) .

(a)

(i)

p =the

(ii)

(iii)

q =the

r =the

probability of smoking for workers not aected by workplace smoking bans=0.2896

Table 4:

smkban mean

0

0.2896

0.2120

Total

Source:

0.2423

Smoking.dta

(b) The estimated dierence in the probability of smoking between workers aected by ban and not is

One linear probability model is

Yn = 0 + 1 Xn + Un

where

Yn

Xn

is the dummy variable which is 1 if there is a work area smoking ban and 0 otherwise. To account for

the heteroskedasticity, we use the command robust and have the following STATA results.

To test the statistical signicance of the probability dierence, we test

t statistic =

Ho : 1 = 0

0.0776 0

= 8.6222 tdf =9998

0.0090

vs

H1 : 1 6= 0.

smkban

-0.078

(0.009)

Intercept

0.290

(0.007)

N

R

10000

0.008

F (1,9998)

75.061

With this large number of observations, t-distribution is well approximated to the normal distribution

so that p-value is 0.000. Hence, we may reject the null hypothesis that

1 = 0

(c) We posit a following population regression model.

smokern

+5 hsdropoutn + 6 hsgradn + 7 colsomen + 8 colgradn

+9 blackn + 10 hispanicn + Un

smokern

+0.3227 hsdropoutn + 0.2327 hsgradn + 0.1643 colsomen + 0.0448 colgrad(3)

n

0.0276 blackn 0.1048 hispanicn + Un

The coecient on the smkban changes to -0.0472 from -0.0776. That is, the impact of smoking ban

policy at workplace, measured in absolute magnitude, on the probability of smoking decreases. Why

does it decrease? Mechanically, as there are more independent variables in the regression equation, it

is likely that an explanatory power of one variable decreases since newly added variables also explain

the dependent variable. Also, the model in (b) suers from omitted variable bias. That is,

smkban

may be correlated with the education/race/gender indicators or with age. For example, workers with

a college degree are more likely to work in an oce with a smoking ban than high-school dropouts,

and college graduates are less likely to smoke than high-school dropouts.

(d)

Ho : 1 = 0

vs

H1 : 1 6= 0

test statistic =

0.0472 0

= 5.2444 tdf =9989

0.0090

With this large number of observation, t-distribution is well approximated to the normal distribution

so that p-value is 0.000. Hence, we may reject the null hypothesis that

1 = 0

workplace smoking ban aects the probability of smoking. The 95% condence interval can be read

o of the STATA output in Figure 1 and is (-0.0648,-0.0297).

(e)

Ho : 5 = 6 = 7 = 8 = 0

vs

H1 : not Ho .

That

The baseline education level is a Master's degree or higher.

Notice that

Therefore, as the education level rises, we observe one exhibits lower probability of smoking.

(f ) The coecient on

age

age2

.05

Fitted values

.05

.1

.15

.2

20

40

60

80

age in years

(a) From the STATA results below, we have the following probit model.

Yn

+1.1416 hsdropn + 0.8827 hsgradn + 0.6771 colsomen + 0.2347 colgradn

(4)

so that

().

smkban,

and so forth.

Variable

smkban

-0.159

-0.112

(0.029)

age

0.035

(0.007)

age2

0.000

(0.000)

hsdrop

1.142

(0.072)

hsgrad

0.883

(0.060)

colsome

0.677

(0.061)

colgrad

0.235

(0.065)

black

-0.084

(0.053)

hispanic

-0.338

(0.048)

Intercept

-1.735

(0.153)

10000

Log-likelihood

-5235.868

2(10)

(b)

Ho : 1 = 0

t statistic =

vs

(0.029)

female

602.597

H1 : 1 6= 0

0.15860

0.0290

Assuming the t-distribution is well approximated to the standard normal distribution for this large

sample, at the 5% level, we may reject the null because p-value=0.000. The result is the same as in

part (d) of Question 4 which gives the t-statistic=-5.2444.

(c)

Ho : 5 = 6 = 7 = 8 = 0

vs

H1 : not Ho

The critical value for

2df =4

at the 5% level is 9.488 < 496.7244 and thus we may reject the null and con-

clude that the education aects the probability of smoking. Notice that

4.

8

df = q = # of restrictions =

Just like Question 4 part (e), this yields the identical results of rejecting the null and

8 > 0.

Since the baseline education level is a Master's degree or higher, we observe one exhibits lower

Variable

smkban

-0.241

-0.059

(0.028)

age

0.014

(0.007)

age2

0.000

(0.000)

black

0.001

(0.052)

hispanic

-0.120

(0.045)

Intercept

-0.708

(0.134)

10000

Log-likelihood

-5484.230

2(6)

(d)

Ho : 3 = 4 = 0

vs

(0.028)

female

105.872

H1 : not Ho

The critical value for

2df =2

at the 5% level is 5.991<45.8178 and thus we may reject the null and

df = 2

here.

Variable

smkban

-0.156

(0.029)

female

-0.114

(0.029)

hsdrop

1.093

(0.071)

hsgrad

0.863

(0.059)

colsome

0.669

(0.060)

colgrad

0.240

(0.065)

black

-0.078

(0.053)

hispanic

-0.313

(0.047)

Intercept

-1.157

(0.058)

10000

Log-likelihood

-5258.777

2(8)

556.779

(e) Fitted value in this probit model of Aloysius. To calculate the probabilities, take the estimation results from the probit model to calculate

at Yn , i.e.,

P rob(smoke) =

(Yn ).

Aloysius' covariates is

0.090088

ban,

X A ,N o =[0

X A ,Y es =[1

0 20 400 1 0 0 0 0 0 1 ] and

XA,N o = 0.248718

Then,

XA,N o =

= 0.4641.

With the

= 0.4013.

The marginal eect of smoking ban for Aloysius is the lowering of the probability of smoking by

0.4641-0.4013=0.0628.

(f ) Fitted value of Brenda. Brenda's covariates without the ban is

so that

XB,N o = 1.0637963

0.1446.

XB,Y es

XB,N o =[0

1 40 1600 0 0 0 1 1 0 1]

= 0.1112.

The marginal eect of smoking ban for Aloysius is the lowering of the probability of smoking by

0.1446-0.1112=0.0334.

(g)

Using the equation (3),

T = [0.04723990.03325690.00967440.00013180.32271420.23270120.16429680.0447983

P r(smokerA |N o )

XA,N o = 0.4494

P r(smokerA |Y es )

XA,Y es = 0.4021

The marginal eect of smoking ban for Aloysius from the LPM (linear probability model) is the lowering

of the probability of smoking by 0.4494-0.4021=0.0472.

Similary for Brenda,

P r(smokerB |N o )

XB,N o = 0.1460

P r(smokerB |Y es )

XB,Y es = 0.0987

The marginal eect of smoking ban for Brenda from the LPM is the lowering of the probability of

smoking by 0.1460-0.0987=0.0472.

(h) The probit and LPM results give similar predictions for the probabilities of both Aloysius and

Brenda. However, they yield dierent predictions of the eect of smoke ban on probability of smoking.

10

That is, the marginal eect of smoking ban for the probit model varies by the characteristics of an

individual here, the marginal eects of Aloysius and Brenda are dierent. On the other hand the

marginal eect of smoking ban for the LPM is identical for Aloysius and Brenda by the coecient of

smkban

variable. This makes us believe that the probit model is more convincing than the LPM.

Are the estimated eects large in an economic (i.e., real-world) sense? Most people might believe

the impacts are large. For example, in (e) the reduction on the probability is 6.3%. Applied to a large

number of people, this translates into a 6.3% reduction in the number of people smoking.

(i) Across groups, observe that the smoker ratio with the smoking ban is 0.2120 while that without the

ban is 0.2896. Thus, the average eect of a workplace smoking ban is 0.2896-0.2120=0.0776 around

8%.

Practically, this might not be signicant if the group characteristics seem to dier from each

other. Especially, the education level is quite varying between smokers and nonsmokers and thus, it

might not measure the average partial eect of the smoking ban policy well enough.

Table 9:

smkban

smoker female

age hsdrop hsgrad colsome colgrad black hispanic

0.2896

0.4923

38.0871

0.1258

0.3721

0.2717

0.1548

0.0746

0.2120

0.6094

39.0810

0.0690

0.2975

0.2857

0.2243

0.0784

0.1046

Total

0.2423

0.5637

38.6932

0.0912

0.3266

0.2802

0.1972

0.0769

0.1134

Source:

Smoking.dta

(j) What we did in part (i) corresponds to the option 2 of the last Friday lecture, i.e., quick and

dirty way of obtaining the average partial eect. It plugs in the average values of the variables into

the partial derivatives. However, as we saw in (i), it might be less appealing if we can not dene an

individual of average characteristics. An alternative method is the option 1; the average partial eect

is calculated by the sample average of the partial eects of all individuals. The quantities from option

1 and 2 are usually dierent as it is a nonlinear function. Specically, the option 1 measures

F (X)

]

E[

X2

E[F (X)|X]

"

#

N

X

F (Xn )

/N

X2n

n=1

"

N

X

#

(F (Xn |X1n = 1) F (Xn |X1n = 0)) /N

n=1

(k)

P r[Yn = 1|Xn ]

age

G(Xn )

Yn

= g(Xn )

|evaluated at Xn

age

age

= g(Xn ) [3 + 24 age] |evaluated at Xn

(5)

We want to evaluate this average eect of age by plugging the sample means for variables in the data

which is given below.

11

0.1271

Table 10:

stats

smkban female

mean

Source:

0.6098

0.5637

age hsdrop hsgrad colsome colgrad black hispanic

38.6932

0.0912

0.3266

0.2802

0.1972

0.0769

Smoking.dta

=

X

+1.1416 hsdropn + 0.8827 hsgradn + 0.6771 colsomen + 0.2347 colgradn

0.0843 blackn 0.3383 hispanicn |all evaluated at X

+1.1416 .0912 + 0.8827 .3266 + 0.6771 .2802 + 0.2347 .1972

0.0843 .0769 0.3383 .1134

0.7247

= (0.7247) 1 (0.72) = 1 0.7642 = 0.2358

)

P rob(smoking|X

0.3068 [0.0345 + 2 (0.0005) 38.6932] = 0.0013

where

g()

is the pdf of Normal distribution. This is the average marginal eect of a one-unit change

(l) While the coecient on

age for X is positive at 0.0345 so that higher age increases the probability

age

age-specic marginal changes. This age-specic marginal eect dierence can give a completely wrong

estimates for the change in smoking probability induced by a work-place smoking ban.

(m)

Plugging the sample means of Table 11 into

X24 = 0.7783 = g(0.7783) [0.0345 + 2 (0.0005) 24] = 0.003094299

X30 = 0.7477 = g(0.7477) [0.0345 + 2 (0.0005) 30] = 0.001357454

X36 = 0.7550 = g(0.7550) [0.0345 + 2 (0.0005) 36] = 0.00045001

It seems that the average eect of aging on smoking tendency is approximately concave and this is

12

0.1134

smkban female hsdrop hsgrad colsome colgrad black hispanic

Table 11:

age

18

0.49

0.48

0.31

0.56

0.13

0.00

0.06

0.18

24

0.60

0.58

0.08

0.31

0.32

0.27

0.09

0.18

30

0.59

0.58

0.09

0.31

0.26

0.24

0.09

0.12

36

0.62

0.53

0.05

0.33

0.28

0.20

0.09

0.10

Total

0.59

0.55

0.10

0.34

0.27

0.21

0.09

0.14

Source:

Smoking.dta

consistent with Figure 2. From the data, the marginal eect with respect to 6-years is less than 1%

but economy as a whole could represent a large shift in smoking population.

(n) The method 2 serves better for our aim of computing the change in smoking probability induced

by a work-place smoking ban than the method 1. However, it is not clear how to divide the age bin

and this arbitrary assignment may results in an inappropriate outcome.

13

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