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Introduction to Econometrics (3rd Updated Edition)

by

are provided to students on the textbook website. If you find errors in the solutions,

please pass them along to us at mwatson@princeton.edu.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 1

_____________________________________________________________________________________________________

College (X1) 8.31** 8.32** 8.34**

(0.23) (0.22) (0.22)

Female (X2) −3.85** −3.81** −3.80**

(0.23) (0.22) (0.22)

Age (X3) 0.51** 0.52**

(0.04) (0.04)

Northeast (X4) 0.18

(0.36)

Midwest (X5) −1.23**

(0.31)

South (X6) −0.43

(0.30)

Intercept 17.02** 1.87 2.05*

(0.17) (1.18) (1.18)

(a) The t-statistic is 8.31/0.23 = 36.1 > 1.96, so the coefficient is statistically

significant at the 5% level. The 95% confidence interval is 8.31 ± (1.96 × 0.23).

(b) t-statistic is −3.85/0.23 = −16.7, and 16.7 > 1.96, so the coefficient is statistically

significant at the 5% level. The 95% confidence interval is −3.85 ± (1.96 × 0.23).

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 2

_____________________________________________________________________________________________________

7.3. (a) Yes, age is an important determinant of earnings. Using a t-test, the t-statistic is

0.51/0.04 = 12.8, with a p-value less than .01, implying that the coefficient on age

is statistically significant at the 1% level. The 95% confidence interval is 0.51 ±

(1.96 × 0.04).

(b) ΔAge × [0.51 ± 1.96 × 0.04] = 5 × [0.51 ± 1.96 × 0.04] = 2.55 ± 1.96 × 0.20 =

$2.16 to $2.94

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 3

_____________________________________________________________________________________________________

7.4. (a) The F-statistic testing the coefficients on the regional regressors are zero is 7.38.

The 1% critical value (from the F3, ∞ distribution) is 3.78. Because 7.38 > 3.78,

(b) The expected difference between Juanita and Molly is (X6,Juanita − X6,Molly) × β6 = β6.

Thus a 95% confidence interval is −0.43 ± (1.96 × 0.30).

A 95% confidence interval could be contructed using the general methods discussed

in Section 7.3. In this case, an easy way to do this is to omit Midwest from the

regression and replace it with X5 = West. In this new regression the coefficient on

South measures the difference in wages between the South and the Midwest, and a

95% confidence interval can be computed directly.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 4

_____________________________________________________________________________________________________

t = ( β̂ college,2012 − β̂ college,1992 )/SE( β̂ college,2012 − β̂ college,1992 ).

Because β̂ college,2012 and βˆcollege,1992 are computed from independent samples, they are

1

This implies that SE( β̂ college,2012 − β̂ college,1992 ) = (0.222 + 0.332 ) 2 = 0.40.

Thus, the t-statistic is (8.32 − 8.66)/0.40 = −0.85. The estimated change is not

statistically significant at the 5% significance level (0.85 < 1.96).

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 5

_____________________________________________________________________________________________________

means that two workers, identical in every way but gender, are paid different

wages. Thus, it is also important to control for characteristics of the workers that

may affect their productivity (education, years of experience, etc.) If these

characteristics are systematically different between men and women, then they may

be responsible for the difference in mean wages. (If this were true, it would raise an

interesting and important question of why women tend to have less education or

less experience than men, but that is a question about something other than gender

discrimination.) These are potentially important omitted variables in the regression

that will lead to bias in the OLS coefficient estimator for Female. Since these

characteristics were not controlled for in the statistical analysis, it is premature to

reach a conclusion about gender discrimination.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 6

_____________________________________________________________________________________________________

2.61 = 0.186 < 1.96. Therefore, the coefficient on BDR is not

statistically significantly different from zero.

(b) The coefficient on BDR measures the partial effect of the number of bedrooms

holding house size (Hsize) constant. Yet, the typical 5-bedroom house is much

larger than the typical

2-bedroom house. Thus, the results in (a) says little about the conventional

wisdom.

(c) The 99% confidence interval for effect of lot size on price is 2000 × [.002 ±

2.58 × .00048] or 1.52 to 6.48 (in thousands of dollars).

(d) Choosing the scale of the variables should be done to make the regression

results easy to read and to interpret. If the lot size were measured in thousands

of square feet, the estimate coefficient would be 2 instead of 0.002.

(e) The 10% critical value from the F2, ∞ distribution is 2.30. Because 0.08 < 2.30,

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 7

_____________________________________________________________________________________________________

7.8. (a) Using the expressions for R2 and R 2, algebra shows that

n −1 n − k −1

R2 = 1− (1 − R 2 ), so R 2 = 1 − (1 − R 2 ).

n − k −1 n −1

420 − 1 − 1

Column 1: R 2 = 1 − (1 − 0.049) = 0.051

420 − 1

420 − 2 − 1

Column 2: R 2 = 1 − (1 − 0.424) = 0.427

420 − 1

420 − 3 − 1

Column 3: R 2 = 1 − (1 − 0.773) = 0.775

420 − 1

420 − 3 − 1

Column 4: R 2 = 1 − (1 − 0.626) = 0.629

420 − 1

420 − 4 − 1

Column 5: R 2 = 1 − (1 − 0.773) = 0.775

420 − 1

(b) H 0 : β3 = β 4 = 0

H1 : β 3 ≠, β 4 ≠ 0

Y = β 0 + β1 X 1 + β 2 X 2 + β3 X 3 + β 4 X 4 , Runrestricted

2

= 0.775

Y = β 0 + β1 X 1 + β 2 X 2 , Rrestricted

2

= 0.427

2

( Runrestricted − Rrestricted

2

)/q

FHomoskedasticityOnly = , n = 420, kunrestricted = 4, q = 2

(1 − Runrestricted )/(n − kunrestricted − 1)

2

= = = = 322.22

(1 − 0.775)/(420 − 4 − 1) (0.225)/415 0.00054

5% Critical value form F2,00 = 4.61; FHomoskedasticityOnly > F2,00 so Ho is rejected at the

5% level.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 8

_____________________________________________________________________________________________________

7.8 (continued)

(c) t3 = −13.921 and t4 = 0.814, q = 2; |t3| > c (Where c = 2.807, the 1% Benferroni

critical value from Table 7.3). Thus the null hypothesis is rejected at the 1%

level.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 9

_____________________________________________________________________________________________________

Yi = β0 + γ X1i + β2 ( X1i + X 2i ) + ui

(b) Estimate

Yi = β0 + γ X1i + β2 ( X 2i − aX1i ) + ui

(c) Estimate

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 10

_____________________________________________________________________________________________________

SSRrestricted − SSRunrestricted

7.10. Because R2 = 1 − TSS

SSR 2

, Runrestricted − Rrestricted

2

= TSS

and

1 − Runrestricted

2

= SSRunrestricted

TSS . Thus

2

( Runrestricted − Rrestricted

2

)/q

F=

(1 − Runrestricted )/(n − kunrestricted − 1)

2

SSRrestricted − SSRunrestricted

/q

= TSS

SSRunrestricted

TSS /(n − kunrestricted − 1)

( SSRrestricted − SSRunrestricted )/q

=

SSRunrestricted / (n − kunrestricted − 1)

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 7 11

_____________________________________________________________________________________________________

7.11. (a) Treatment (assignment to small classes) was not randomly assigned in the

population (the continuing and newly-enrolled students) because of the

difference in the proportion of treated continuing and newly-enrolled students.

Thus, the treatment indicator X1 is correlated with X2. If newly-enrolled

students perform systematicallydifferently on standardized tests than continuing

students (perhaps because of adjustment to a new school), then this becomes

part of the error term u in (a). This leads to correlation between X1 and u, so that

E(u|Xl) ≠ 0. Because E(u|Xl) ≠ 0, the β̂1 is biased and inconsistent.

(continuing or newly-enrolled), E(u|X1, X2) will not depend on X1. This means

unbiased and consistent. However, because X2 was not randomly assigned

(newly-enrolled students may, on average, have attributes other than being

newly enrolled that affect test scores), E(u|X1, X2) may depend of X2, so that βˆ2

may be biased and inconsistent.

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