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? ? November 2015 ?

EXAMS OFFICE USE ONLY

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University of the Witwatersrand, Johannesburg

Course or topic number ECON2001 and ECON2008

Course or topic name ECONOMICS IIB


Paper number and title PAPER II ECONOMIC STATISTICS AND
MATHEMATICAL ECONOMICS

Examination/Test to be held during


month of EXAMINATION: November 2014

Year of study
(Arts & Science leave blank) SECOND YEAR

Degrees/Diplomas for which this course


is prescribed [BSc (Eng) should indicate B.A., B.COM., B.ECON. SCIENCE &
which branch] B. SCIENCE

Faculty/ies presenting candidates


ARTS; COMMERCE, LAW & MANAGEMENT;
SCIENCE; ENGINEERING

Internal examiner(s) and telephone


extension number(s) Mr Mthokozisi Mlilo, X78099

External examiner(s)
?

Special materials required (graph/music/


drawing paper) maps, diagrams, tables, 2 ANSWER BOOKS
computer cards, etc)

Time allowance Course no. | ECON2001/8 | Hours | 2


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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

THIS PAPER HAS TWO SECTIONS


SECTION A: Economic Statistics
Instructions to candidates (examiners
may wish to use this space to indicate, SECTION B: Mathematical Economics
inter alia, the contribution made by this Read ALL instructions before answering any part of this
examination or test towards the year paper.
mark, if appropriate) Answer all questions
Answer each section in a different coloured book.

Instructions to Candidates:
Answer all questions in both sections
Provide all calculations
Section A is Economic Statistics
Section B is Mathematical Economics.
Answer each section in a separate booklet provided
You may round off answers to two decimal places if required.
______________________________________________________________________________

SECTION A: ECONOMIC STATISTICS


TOTAL MARKS: 60

QUESTION 1

In a study of Consumers Expenditure on a Commodity a researcher considered three models yielding


the following results:

Where
Y is Consumers Expenditure on a Commodity, in dollars
X1 is Consumers Income, in dollars
X2 is Consumers Wealth, in dollars

Model 1

Y = 0 + 1 X 1 + u (1)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.706606
R Square 0.499292
Adjusted R
Square 0.474256
Standard Error 41.50921
Observations 22
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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

ANOVA
Significance
df SS MS F F
Regression 1 34362.8 34362.8 19.94342 0.000237
Residual 20 34460.29 1723.015
Total 21 68823.09

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
Intercept 66.41288 58.214 1.14084 0.267414 -55.0194 187.8451
X1 0.490662 0.109871 4.465805 0.000237 0.261475 0.719849

Model 2

Y = 0 + 1 ln X 1 + u (2)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.721108
R Square 0.519997
Adjusted R
Square 0.495997
Standard Error 40.64189
Observations 22

ANOVA
Significance
Df SS MS F F
Regression 1 35787.83 35787.83 21.6664 0.000153
Residual 20 33035.26 1651.763
Total 21 68823.09

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
Intercept -1235.783 335.0722 -3.688109 0.00146 -1934.731 -536.834
X Variable 1 249.5332 53.60860 4.654722 0.00015 137.7076 361.3587

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

Model 3

Y = 0 + 1 ln X 1 + 2 ln X 2 + u (3)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.734476
R Square 0.539455
Adjusted R
Square 0.490977
Standard Error 40.84382
Observations 22

ANOVA
Significance
df SS MS F F
Regression 2 37126.96 18563.48 11.12773 0.000633
Residual 19 31696.13 1668.217
Total 21 68823.09

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
Intercept 932.0878 2442.945 0.381543 0.707034 -4181.05 6045.23
X Variable 1 412.2592 189.4455 2.176136 0.042367 15.74527 808.7732
X Variable 2 -487.838 544.4907 -0.89595 0.381489 -1627.47 651.7941

a) Find and interpret the slope coefficient of model 2. [7 marks]

Solution:


2 2
= (
) [1 mark]
2
1, = 2 [1 mark]
= 1, = 21.6664 4.65 [1 mark]

2 2 2 0
= (
) 4.65 = 53.6086 2 = 4.65 53.6086 249.28
2
[2 marks]

If consumer income increases by 1%, on average, expenditure increases by $249.28/100 $2.49


[2 marks]

b) What is the average elasticity of X2 in model 3? (2 = 323.36 and =6.53) [4 marks]

Solution:

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

2 1 2 1
Elasticity = = 2 = 2 [1 mark]
2 2
1 487.838
Average Elasticity = 487.838 6.53 = 74.71 [3 marks]
6.53

c) A priori, would you choose model 1 over model 2? Justify. [3 marks]

Solution:

The relationship between Consumers Expenditure on a Commodity and Consumer Income is


best described by the Engel Expenditure Curve. Thus, since Consumers Expenditure on a
Commodity tends to increase in arithmetic progression as Consumers income increases in
geometric progression model 2 best capture this relationship. OR
Any other explanation that notes that changes in income do not generate a correspondingly equal
change in expenditure. [3 marks]

d) Which assumption is required to undertake hypothesis testing? Explain how you would test
whether the assumption holds (choose one test). [6 marks]

Solution:

Hypothesis testing requires that the error terms be normally distributed [2 marks]. See Gujarati
and Porter, Ch3.9 for normality tests [4 marks]

e) Use the confidence interval approach to test the hypothesis that there is no relationship between
Consumers Expenditure on a Commodity and Consumers Income in model 1. (Use 0.02 level
of significance.) [6 marks]

Solution:

1 2, 1 = 1 = 99.8% [1 mark]
= = 68823.09 34362.8 = 34460.29
34460.29
n k = = 1723.015 20 OR could have picked the d.f from model 2 & 3[2 marks]
1 (0.022),20 1 = 0.490662 2.528 0.109871 = [0.213; 0.768] [2
marks]

The hypothesized value of zero lies outside the interval. Thus, we reject the hypothesis
that X1 in model 1 has no effect on Y. [1 marks]

f) Is the addition of variable X2 to model 2 worthwhile? Show that to be the case. (Or not.)
[4 marks]
Solution:

( 2 2 )/
= (12 ~, [1 mark]
)/()

2
Where: is the R2 obtained from the unrestricted model
2 is the R2 obtained from the restricted model
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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

m is the number of restrictions imposed


n is the sample size
k is the number of parameters in the unrestricted model

(0.540.52)/1 0.02
= (10.54)/19
= 0.02 = 1 [2 marks]

Since 1 < , = 4.38 then the addition of variable X2 to model 2 is not worthwhile.
[1 marks]

g) In which model between models 1 and 2 the linear relationship between Consumers Expenditure
on a Commodity and Consumers Income is stronger? [4 marks]

Solution:

= 2 [1 mark]

Model 1: = 0.50 0.71 [1 mark]


Model 2: = 0.52 0.72 [1 mark]

Since 0.72 > 0.71 then the linear relationship between Consumers Expenditure on a Commodity
and Consumers Income is stronger in model 2 [1 mark]

h) Explain what is the difference between R2 and the adjusted-R2? Calculate the adjusted-R2 for
model 3. [8 marks]

Solution:

Adjusted R2 is a modification of R2 that adjusts for the number of explanatory


variables in the model. Adjusted R2 imposes a penalty for adding additional independent
variables to a regression equation. R2 will generally increase with the addition of a new
variable, this will occur even when the additional variables do little to help explain the
dependent variable. To compensate for this, adjusted R2 is corrected for the number of
independent variables in the model. The result is an adjusted R2 that can go up or down
depending on whether the addition of another variable adds or does not add to the
explanatory power of the model. [5 marks]
1
2 = 1 (1 2 ) [1 mark]
221
2 = 1 (1 0.54) 223 0.491 [2 marks]

i) Are the slope coefficients in model 3 jointly significant at 1% level of significance?[8 marks]

Solution:

/ /1 37126.96/2 18563.48
= / = / = 31696.13/19 = 1668.2174 11.13 > 5.93 = ,1, [7 marks]

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

Yes, the slope coefficients are jointly significant at 1% level of significance. [1 mark]

j) For each of the following scenarios write down the functional form of the regression
model theory would suggest. Justify your choice of functional form. [10 marks]

(I) Suppose Y represents output in the short run from a combination of some fixed
inputs and a variable input, labour (L). (L is subject to diminishing marginal
returns to scale)

Solution:

Y= b0 + b1L + b2L2 + u [1 mark]

Justification: Gujarati and Porter, Ch5.7 [1 mark]

(II) Suppose you want to find a relationship between two variables Y (measured as a ratio
between 0 and 1) and X measured in thousands.
Solution:

Y= b0 + b1lnX + u [1 mark]

Where: X has to be rescaled or transformed [1 mark]

Justification: Gujarati and Porter, Ch5.9 [1 mark]

(III) Suppose you want to calculate the compound growth rate of South Africas GDP, g.

Solution:

lnY= b0 + b1t + u [1 mark]


[1 mark]
Where: b0 = lnY0 and Y0 is the initial value of GDP
b1 = ln(1+r) and r is the compound rate of growth of G

Justification: Gujarati and Porter, Ch5.4 [1 mark]

(IV) Suppose X is the quantity of labour and Y is the quantity of capital and you want to
calculate the elasticity of substitution between capital and labour.

Solution:

lnY= b0 + b1ln X + u [1 mark]

Justification: Gujarati and Porter, Ch5.1 [1 mark]

Total: [60 marks]

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

PERCENTAGE POINTS OF THE T-DISTRIBUTION

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

UPPER PERCENTAGE POINTS OF THE F-DISTRIBUTION (extract)

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ECONOMICS IIA (ECON 2001/8) Economic Statistics and Mathematical Economics Final Examination - 2015

SECTION B: MATHEMATICAL ECONOMICS


TOTAL MARKS: