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University of the Witwatersrand, Johannesburg

Paper number and title PAPER II ECONOMIC STATISTICS AND

MATHEMATICAL ECONOMICS

month of EXAMINATION: November 2014

Year of study

(Arts & Science leave blank) SECOND YEAR

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

which branch] B. SCIENCE

ARTS; COMMERCE, LAW & MANAGEMENT;

SCIENCE; ENGINEERING

extension number(s) Mr Mthokozisi Mlilo, X78099

External examiner(s)

?

drawing paper) maps, diagrams, tables, 2 ANSWER BOOKS

computer cards, etc)

School of Economic and Business Sciences Page 1 of 8

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

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.

______________________________________________________________________________

TOTAL MARKS: 60

QUESTION 1

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

1

School of Economic and Business Sciences Page 2 of 8

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

2

School of Economic and Business Sciences Page 3 of 8

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

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]

[2 marks]

Solution:

3

School of Economic and Business Sciences Page 4 of 8

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

Solution:

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

4

School of Economic and Business Sciences Page 5 of 8

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

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 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:

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]

5

School of Economic and Business Sciences Page 6 of 8

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:

(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]

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

Solution:

[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

(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:

6

School of Economic and Business Sciences Page 7 of 8

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

7

School of Economic and Business Sciences Page 8 of 8

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

8

School of Economic and Business Sciences Page 9 of 8

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

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