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# 10 Studenmund • Using Econometrics, Sixth Edition

4-8. ˆ )2 = Σ(Y − βˆ − βˆ X )2 . To find the minimum, differentiate Σe 2
We know that Σe 2i = Σ(Yi − Yi i 0 1 i i
ˆ ˆ
with respect to β0 and β1 and set each derivative equal to zero (these are the “normal equations”):

δ (Σe 2i ) / δβˆ0 = 2[Σ(Yi − βˆ0 βˆ1X i )] = 0

or ΣYi = N( βˆ0 ) + βˆ1 (ΣX i )

δ (Σe 2i ) / δβˆ1 = 2[Σ(Yi − βˆ0 βˆ1X i )X i ] = 0

or ΣYi X i = βˆ0 (X i ) + βˆ1 (ΣX 2i )

Solve the two equations simultaneously and rearrange:

βˆ1 = [N(ΣYi X i ) − ΣYi X i ]/N(ΣX i2 ) − (ΣX i )2 ]

where x i = (X i − X) and y i = (Yi − Y).

βˆ0 = [ΣX 2i ΣYi − ΣX i ΣX i Yi ] /[N(ΣX 2i ) − (ΣX i )2 ] = Y − βˆ1X

To prove linearity:

βˆ1 = Σx i y i /Σx 2i = Σx i (Yi − Y)/ΣX 2i
= Σx i Yi /Σx 2i − Σx i (Y)/ΣX 2i
= Σx i (Yi ) / Σx 2i − YΣx i / ΣX 2i
= Σx i (Yi ) / Σx 2i since Σx i = 0
= Σk i Yi where k i = x i / Σx 2i

βˆ1 is a linear function of Y, since this is how a linear function is defined. It is also a
linear function of the β s and !, which is the basic interpretation of linearity.
βˆ1 = βˆ0 Σk1 + β1 k i x i + Σk i!1 . βˆ0 = Y − βˆ1 (X) where Y = βˆ0 + βˆ1 (X), which is also a
linear equation.

To prove unbiasedness:

βˆ1 = Σk i Yi = Σk i ( β 0 + β1X1 + !i )
= Σk i β 0 + Σk i β1X i + Σk i!i

Since k i = x i / ΣX 2i = (X i − X) / ΣX i − X)2 , then Σk1 = 0, ΣX 2i = 1/ ΣX 2i , Σk i x i = Σk i X i = 1

So, βˆi = β1 + Σk i!1 , and given the assumptions of !, E( βˆ1 ) = β1 + Σk1E(!1 ) = β1 , proving βˆ1 is
unbiased.