Q 3.

(a)
Fitted Model
= 6.854991 + 3.880186
(7.383473) (.1121246)
R2 = 0.9852, N = 20

600
y = 3.880x + 6.855
500

Average Income =
59.3

400

300

200

Average Insurance = 236.95

100

0
0

20

40
insurance

60

80

fitted_insurance

100

120

Linear (fitted_insurance)

140

160

(b)
i) Our estimates suggests that when income increases by $ 1,000, the insurance increases by
$3,880.186.
ii) The standard error of the estimate in (i) is .1121246*1000. For hypothesis testing we divide the
estimated income by the standard error of the estimated income and calculate the t-statistic. We then
compare the t-statistic with the t-table value is greater than the table value, we reject the null
hypothesis that the coefficient is equal to zero against the alternative that the coefficient is not equal to
zero. We can also construct the confidence interval by multiplying the standard error by the table value
of the t-statistic and then subtracting and adding this value to the estimated coefficient.
Illustration:
Hypothesis testing,
H0 : Actual increase in life insurance= c
H1: Actual increase in life insurance c

Confidence Interval (95 percent) = [3644.567254, 4115.804746]

3880.186 2.101 (0.112146 1000)
If 'c' lies outside this confidence interval we reject our null hypothesis against the alternative
hypothesis.
(c)
Doing the hypothesis testing,
H0 : 2 = 5
H1: 2 < 5

3.880186 5
= 9.9853
0.112146

= 1.734

As 9.9853 > 1.734,We reject the null hypothesis that the coefficient is equal to 5 at 5
percent level of significance against the alternative hypothesis that it is less than 5.
So, our estimated relationship does not support the claim.

(d)
Setting up the null hypothesis and alternative hypothesis,
H0 : 2 = 1
H1: 2 > 1

3.880186 1
= 25.6825
0.112146
.

= 1.734

As 25.6825 > 1.734,We reject the null hypothesis that the coefficient is equal to 1 at 5
percent level of significance against the alternative hypothesis that it is greater than 1.
(e)
Source
Model
Residual
Total

insurance
income
_cons

SS

df

MS

250568.95 19 13187.8395

Number of obs =
F( 1, 18)
Prob > F
R-squared
Adj R-squared
Root MSE

Coef.
Std. Err. t
3.880186 .1121246 34.61
6.854991 7.383473 0.93

P>t [95% Conf.

0.000 3.644621
0.365 -8.65711

246858.575 1 246858.575
3710.37471 18 206.131929

20
1197.58
0
0.9852
0.9844
14.357

Interval]
4.115751
22.36709

= 6.854991 + 3.880186
(7.383473) (.1121246)
R2 = 0.9852, N = 20

Short Report
In the above estimated equation we find that intercept coefficient is not statistically
significantly different from zero (p-value = 0.365). So, when the income of the family is zero, the

amount of life insurance is not different from zero (statistically). This is also intuitively true as
the family with zero income would not have money to insure itself.
When the income of the family increases by $1000, the amount of life insurance held by the
family increases by $3880. This is statistically significantly different from zero (p-value = 0.000).
This also seems to be a logical claim based on the economic intuition, as when the income of
the family increases, it can pay more for its life insurance. Also, as income is high the amount of
money which would be lost in case of death would be higher, so the family would try to
increase the amount of life insurance.
The R2 of the estimated equation is 98.52 percent, this says that 98.52 percent of the variation
in the amount spent on life insurance is being explained by the variation in family income.

3.15
(a)
Source

SS

df

MS

Model
Residual

47.08344 1 47.0834389
159.2969 628 .25365749

Total

206.3803 629 .328108652

lcrmrte
prbarr
_cons

Coef.

Std. Err.

Number of obs =
F( 1, 628)
Prob > F
R-squared
Adj R-squared
Root MSE

P>t

-1.59806 .1172959 -13.62

-3.11803 .0412608 -75.57

[95% Conf.

0.000 -1.8284
0.000 -3.199058

630
185.62
0
0.2281
0.2269
0.50364

Interval]
-1.367721
-3.037006

If we increase the probability of arrests by 10 percent (0.10) the crime committed per person
would reduce by (1.59806*0.10) = 15.9806 percent.
The variance-covariance matrix of the coefficients is :
e(V)

prbarr

_cons

prbarr
_cons

0.01375833
-0.00422887

0.0017025

95 % confidence interval = sqrt (0.10^2*0.01375833) = 0.01173

95 percent confidence interval for this estimate is = -0.159806 0.01173*1.96 =-0.159806
0.02299. There for the interval is [-0.1828, -0.13682]
(b)
Doing the hypothesis testing,
H0 : 2 = 0
H1: 2 < 0

1.59806 0
. 1172959

= 13.62

= 2.326

As 13.62 > 2.326, we reject the null hypothesis that the coefficient is equal to 0 at 1
percent level of significance against the alternative hypothesis that it is less than 0.
(c)
Source

SS

df

MS

Model
Residual

7.40663868 1 7.40663868
198.973704 628 .316837108

Total

206.380342 629 .328108652

lcrmrte
prbconv
_cons

Coef.

Std. Err.

-0.0641963 .0132775 -4.83

-3.565019 .024218 -147.21

Number of obs =
F( 1, 628)
Prob > F
R-squared
Adj R-squared
Root MSE

P>t

[95% Conf.

0.000 -.09027
0.000 -3.612577

630
23.38
0
0.0359
0.0344
0.56288

Interval]
-0.0381226
-3.51746

If we increase the probability of conviction by 10 percent (0.10) the crime committed per
person would reduce by (0.0641963*0.10) = 0.641963 percent.
The variance-covariance matrix of the coefficients is :
e(V)
prbconv
_cons

prbconv
0.00017629
-0.0001214

_cons
0.00058651

95 % confidence interval = sqrt (0.10^2*0.00017629) = 0.001328

95 percent confidence interval for this estimate is = -0.00641963 0.001328*1.96 =-0.159806
0.02299. There for the interval is [-0.00775, -0.00509]
(b)
Doing the hypothesis testing,
H0 : 2 = 0
H1: 2 < 0

0.0641963 0
. 0132775

= 4.83

= 2.326

As 4.83> 2.326, we reject the null hypothesis that the coefficient is equal to 0 at 1
percent level of significance against the alternative hypothesis that it is less than 0.