Homework 1: Simple Linear Regression Models

Question 1: Deriving OLS Estimators

(a) Write down the two first order conditions used to solve for the least squares

estimator. Use the information above to compute ^ , ^ .

The first order conditions for the minimization problem,

yi
2
( x i )
min
min SSR=
,

Are,

1) [ ]=2 ( y i x i )=0
x i ( y i x i )=0
2)
[ ] =2

So,

^= ( y i y )(x ix ) = 55 =1.474
(x ix )2 37.3

^ = y 1.474 x =7.091

(b) Matrix algebra

T
X

=
^

First we solve:
 11

()
11
1
1 104 20
X T X 1
= ( 1 11 11 1 12
)
1 1 2 3 5 8 13
=
6 20
(
20 104 ) = (
244 20 6 )(
=
0.464 0.089
0.089 0.021 )
15
18

Then we solve:

XT y

()
8

( )
1 1 1 1 1 1 11 = 72
1 1 2 3 5 8 15 295 ( )
14
18

We finally multiply both results together to get the OLS estimators:

(0.089
0.464 0.089 72
)( ) (
0.021 295
= 7.153
0.213 )
c)