Question 1

log ( wagei ) = 0 + 1 educ i + 2 mothereduc i+ 3 exper i + i ,i=1, , n

Rewriting the above model, this time with the actual parameter values
log ( wagei ) =0.12+0.062 educ i+ 0.033 mothereduci +0.05 exper i
(0.001)

(0.0031)

(0.0211)

(0.0002)

N=552, R2= 0.63, RSS=135.463

a) Hypothesis
H0: 1=0 (own years of schooling does not affect wages)
HA: 1 0 (own years of schooling affects wages)
The appropriate test statistic is a t-test (students t distribution) because it involves testing
for the statistical significance of a regression coefficient which is always a t-test.
coefficient
Calculated t statistic=
standard error of coefficient
0.062
Calculated t statistic=
=20
0.0031
Critical value of t is read from the t-tables
t5%, n-k, where 5% is the level of significance, n-k is the degrees of freedom (n being the
number of observations and k the number of regression coefficients)
t5%, 548= 1.964
Since calculated t is greater than critical t, we reject the null hypothesis and conclude that
own years of schooling affect wages.
b) Hypotheses
H0: 2=0 (mothers years of schooling does not affect wages)
HA: 2 0 (mothers years of schooling affects wages)
Similar to a), this test is a t test because it is testing for the statistical significance of a
regression coefficient.
coefficient
standard error of coefficient
0.033
Calculated t statistic=
=1.5639
0.0211
Calculat ed t statistic=

t5%, n-k, where 5% is the level of significance, n-k is the degrees of freedom (n being the
number of observations and k the number of regression coefficients)
t5%, 548= 1.964
Since the computed t statistic ( 1.5639 is less than critical t (1.964), we fail to reject
the null hypothesis and conclude that mothers years of schooling does not affect wages.
c) Since this is a test for joint significance, the most appropriate test is the F test (F
distribution)
Hypotheses
H0: 1= 2=0 ( own and mothers years of schooling are jointly insignificant)
HA: 1 2 0 (own and mothers years of schooling are jointly significant)
To perform this we need we need both the restricted and the unrestricted model, where
the unrestricted model is the one in which all the independent variables are present and
the restricted model is one in which the coefficients of independent variables under test
have been put to zero.
We have the restricted model as
log ( wagei ) = 0 + 3 exper i+ i ,i=1, , n
The estimated model is
log ( wagei ) =0.10+0.25 exper i
(0.002)

(0.0013)

R2=0.422, RSS=176.23
First, we compute the calculated F statistic using the following formula (RSS means
Residual sum of squares, subscripts ur and r represent unrestricted and restricted models
respectively, and q the number of restrictions.
(RSS r RSSur )/q
F=
RSSur /(nk1)
(176.23135.463)/ 2
F=
135.463 /(55241)
20.3835
F=
0.2476
F=82.3243
At 5% level of significance critical F2, 547=3.0121

Since F calculated is greater than F critical, we reject the null hypothesis and conclude
that education background of an individual does affects their income.
Alternative approach to calculating F
( R2urR 2r )/q
F=
(1R2ur )/( nk 1)
(0.630.422)/2
F=
(10.63)/(55241)
0.104
F=
0.000676416
F=153.7515
Since this values is also greater than F, we uphold the earlier decision to reject the null
hypothesis and conclude that education background of an individual does affect their income.
Question 2
Given this form of F statistic, we can derive the RSS form as follows
( R2urR 2r )/q
F=
(1R2ur )/( nk 1)
By definition
2

R=
But,

ESS
TSS
ESS+ RSS=TSS

Diving the equation through by TSS

ESS RSS TSS
+
=
TSS TSS TSS
Simplifying
ESS RSS
+
=1
TSS TSS
Taking

RSS
TSS

to the RHS

ES S
RSS
=1
TSS
TSS

R 2=

Therefore,

ESS
RSS
=1
TSS
TSS

From the above equation, we can rewrite the

for the restricted model and unrestricted

model as follows
R2ur=1

RSSur
TSS

, and

R2r =1

RSSr
TSS

Substituting these above equivalents into the

R2 form of F statistic formula

RSSur
)/(nk 1)
TSS

RSSur
RSSr
(1
)(1
)/q
TSS
TSS
F=

1(1

Simplifying the numerator

(1

RSSur
RSSr
)(1
)
TSS
TSS
q

Opening the brackets

1

RSSur
RSS r
1+
TSS
TSS

1 cancels out to leave the expression in the form

RSSur RSS r
+
TSS
TSS

q
Rearranging
RSSr RSSur

TSS
TSS
q

Since they components in the numerator have the same denominator, we can combine them to
form
RSSr RSSur
TSS
q
Next, we simplify the denominator
1(1

RSS ur
)/( nk 1)
TSS

We can rewrite this expression to be of the form

RSS ur
)
TSS

1(1

Opening the brackets in the numerator gives us

RSSur
TSS

(nk 1)

11+

This translates to
RSSur
TSS
(nk1)
Combining the simplified numerator and denominator
RSS rRSSur
TSS
q
F=
RSSur
TSS
(nk 1)
Since TSS is present in both the numerator and the denominator, it cancels out.

Therefore,

F=

(RSSr RSSur) /q
, hence proven.
RSSur /(nk1)

Question 3
wagei =0 + 1 educ i+ 2 IQ+ 3 exper i+ 4 sibsi + 5 meduci + 6 feduc i+ i ,i=1, , n
. regress wage educ IQ exper sibs meduc feduc
Source

SS

df

MS

Model
Residual

20838854.5
99235939.5

6
715

3473142.42
138791.524

Total

120074794

721

166539.243

wage

Coef.

educ
IQ
exper
sibs
meduc
feduc
_cons

48.38163
4.48491
19.64647
-.789886
6.861842
11.65737
-556.0551

Std. Err.
8.329356
1.148545
3.666309
6.607232
6.21868
5.389282
146.3361

t
5.81
3.90
5.36
-0.12
1.10
2.16
-3.80

Number of obs
F( 6,
715)
Prob > F
R-squared
Adj R-squared
Root MSE

P>|t|
0.000
0.000
0.000
0.905
0.270
0.031
0.000

=
=
=
=
=
=

722
25.02
0.0000
0.1735
0.1666
372.55

[95% Conf. Interval]

32.02871
2.229986
12.44845
-13.76178
-5.347213
1.076663
-843.3549

64.73455
6.739835
26.84449
12.18201
19.0709
22.23808
-268.7553

The estimated equation becomes

wagei =556.0551+ 48.38163educ i + 4.48491 IQ+19.64647 exper i0 .789886 sibsi +6.861842 meduci +11.6573
a)

Coefficien

t statistic

t
Intercept
Educ
IQ
Exper
sibs
meduc
feduc

-3.80
5.81
3.90
5.36
-0.12
1.10
2.16

Critical value of t5%, 715=1.96

The t test that stata is running by default is used to test the statistical significance of the
estimated parameters. To make decisions about the hypotheses, one has to compare the stata
generated t statistics with the critical value of t.
The intercept parameter is statistically significant at 5% because the absolute value of the
computed t statistic |3.80| is greater than the critical t value (1.96)
The coefficient of education (educ) is statically significant at 5% since its value of t
statistic (5.81) is greater than the critical t value (1.96).
The coefficient of IQ is also statistically significant at 5% because it has a t statistic
(3.90) bigger than the critical t value (1.96)
Similarly, the coefficient of years of experience (exper) is statistically significant at 5%
level because the associated t statistic (5.36) is larger than critical t (1.96)
The coefficient of the number of siblings (sibs) is not statistically significant given that
the absolute value of its t statistic is |0.12| is less than the critical t-value (1.96)
The coefficient of mothers education (meduc) is also not statistically significant given
that its t statistic (1.10) is less than 1.96.
Lastly, the coefficient of fathers education (feduc) is statistically significant because its t
statistic (2.16) is greater than critical t (1.96).
b) The intercept parameter is statistically significant at 5% because the p-value (0.000) is
less than 5% (0.05)
The coefficient of education (educ) is statically significant at 5% because the p-value
(0.000) is less than 5% (0.05)

The coefficient of IQ is also statistically significant at 5% since its p-value (0.000) is less
than 5% (0.05).
Similarly, the coefficient of years of experience (exper) is statistically significant at 5%
level because the associated p-value (0.000) is less than 5% (0.05).
The coefficient of the number of siblings (sibs) is not statistically significant given that pvalue (0.905) is greater than 5% (0.05).
The coefficient of mothers education (meduc) is also not statistically significant because
its p-value (0.270) is greater than 5% (0.05).
Lastly, the coefficient of fathers education (feduc) is statistically significant because the
associated p-value (0.031) is less than 5% (0.05).
c) By default, STATA conducts an F-test, testing the null hypothesis that all the coefficients
on the independent variables are equal to zero.
Given this null hypothesis, then the restricted model is wagei =556.0551 . The F
statistic provided by STATA is F( 6, 715) = 25.02, and the P-value for the F test is
Prob > F = 0.0000. Given the P-value of 0.0000, we can reject the null hypothesis at 5%
because this value is less than 0.05 (5%). We can also reject the null at 1% because the pvalue is less than 0.01.
d) To test the joint significance of the parents education, we put the coefficients of of
meduc and feduc to zero hence our restricted model:
wagei =0 + 1 educ i+ 2 IQ+ 3 exper i+ 4 sibsi + i , i=1, ,n
Using STATA we can estimate this model to get
. regress wage educ IQ exper sibs
Source

SS

df

MS

Model
Residual

25036148.4
127680020

4
930

6259037.1
137290.344

Total

152716168

934

163507.675

wage

Coef.

educ
IQ
exper
sibs
_cons

56.81433
4.795294
17.1867
-8.148281
-467.7095

Std. Err.
7.105801
.9582977
3.117501
5.526098
126.3738

t
8.00
5.00
5.51
-1.47
-3.70

Number of obs
F( 4,
930)
Prob > F
R-squared
Adj R-squared
Root MSE

P>|t|
0.000
0.000
0.000
0.141
0.000

=
=
=
=
=
=

935
45.59
0.0000
0.1639
0.1603
370.53

[95% Conf. Interval]

42.86907
2.914618
11.06855
-18.99335
-715.7204

70.7596
6.675971
23.30486
2.696786
-219.6985

wagei =467.7095+56.81433 educi + 4.795294 IQ+17.1867 exper i +8.148281 sibsi

Hypotheses
H0: 5= 6=0 ( parents education does not affect wages )
HA: 1 2 0 (parents education affects wages)
(RSS r RSSur )/q
F=
RSSur /(nk1)
(12768002099235939.5)/2
F=
99235939.5/(72271)
14222040.25
F=
138985.9096
F=102.327
At 5% level of significance critical F2, 714= 3.008
Given that the calculated value of F ( 102.327 is greater than the critical value
(3.008), we reject the null hypothesis and conclude that parents education affects wages.