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Assignment 1

Question 2

Both models are linear regression models, which meet the assumptions of the

ordinary least square (OLS) regression. The assumptions are: 1) both models are linear

in parameters; 2) the data collected is a random sample from the population; 3) sample

variations of independent variables exist; 4) the expected value of the error terms is zero;

and 5) the residuals have the constant variance. The inference of the regression outputs

of the two models is correlated to the validity of these assumptions. For the estimate of

the first model, the STATA command is “regress lwage exper assists black”. The first

model can be expressed as

lwage = 5.947 + .094 exper + .126 assists + .274 black

(.134) (.014) (.022) (.117)

n = 269, R2 = .2678

The STATA command for the second model is “regress lwage exper assists black points”.

The second model can be expressed as

lwage = 5.592 + .078 exper + .005 assists + .137 black + .082 points

(.119) (.012) (.022) (.100) (.008)

n = 269, R2 = .4743

The p-value of β2 is 0.809 that is higher than the critical value of 0.05, suggesting

that β2 is not statistically significant at the critical level of 5%.

Question 3

In order to get a 90% confidence interval for the effect of points, a new regression

is run by the STATA command “regress lwage exper assists black points, level (90)”.

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Thus, the 90% confidence interval for the effect of one more point per game on player’s

annual salary is [0.069, 0.095]. The confidence interval can be also calculated by the

formula “𝑥 ± z*(σ/ 𝑛)”, where σ/ 𝑛 = standard error. The coefficient of points is 0.082,

the z-score for 90% confidence level is 1.645 and the standard error is 0.008. Thus, the

lower bound of the confidence interval is 0.069= (0.082- 1.645*0.008) and the upper

bound is 0.095 = (0.082+1.645*0.008).

Question 4

R-square can tell the goodness of fit of the model. Specifically, the R-square

indicates the degree to which the dependent variable is explained by the model. In general,

the higher R-square indicates the better goodness of fit of a model. The R-square of the

first model is 0.2678 while the R-square of the second model is 0.4743. Thus, the second

model is preferred to the first model since the second one has the higher R-square, which

means that 47.43 percent of variations in the logarithm of annual salary can be explained

by the second model.

Question 5

The preferred model is

lwage = 5.592 + .078 exper + .005 assists + .137 black + .082 points

Thus, when exper = 5, assists = 3 and points = 20, a black player can earn 7.774 (= 5.592

+ 0.078*5 + 0.005*3 + 0.137*1 + 0.082*20). Therefore, the log of annual salary for a black

player with five years of experiences, 20 points and 3 assists per game is 7.774.

Question 6

The null hypothesis is that the effect of an additional year of experience on annual

salary of players is the same to the effect of one more point per game. The alternative

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hypothesis is that the effect of an additional year of experience on annual salary of players

is different from the effect of one more point per game. In a numeric way, the null and

alternative hypotheses can be expressed as follows:

H0 : β 1 - β4 = 0

Ha : β 1 - β4 ≠ 0

In order to test the hypothesis, the regression based on the second model is run

under the STATA command “regress lwage exper assists black points”. Then the STATA

command “test (_b[exper] = _b[points])” can be used to test the hypothesis mentioned

above. The result is F (1, 264) = 0.07 with a p-value of 0.7882, suggesting that the null

hypothesis cannot be rejected at the critical value of 5%. This means that the effect of an

additional year of experience on annual salary of players is the same to the effect of one

more point per game.

Question 7

It is clear that, with the reference to the second model, we can state that the

variables assists and black are not useful in explaining players’ annual salary. In the

regression analysis of the second model, the coefficients of the two variables are not

statistically significant at the critical level of 5%. After running the second model, the post-

estimation can also help test whether the two variables assists and black are not useful

in explaining players’ annual salary. After running the second model under STATA

command “regress lwage exper assists black points”, I use the command “test (assists

black)” to test the following the hypothesis.

The null hypothesis is that the variable- black has no effect on the players’ annual

salary that the variable- assists has no effect on the players’ annual salary. The alternative

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hypothesis is that the variable- black has the effect on the players’ annual salary and that

the variable- assists has the effect on the players’ annual salary. In a numerical way:

H0: β2 = 0, β3 = 0

Ha: β2 ≠ 0, β3 ≠ 0

The result is F (2, 264) = 0.95 with a p-value of 0.3885, suggesting that the null

hypothesis cannot be rejected at the critical value of 5%. This means that the variables

assists and black have no significant effect on the players’ annual salary and hence these

two variables are not useful in explaining players’ annual salary.

Question 8

The STATA command for the new model is “regress lwage exper expersq assists

black points”. The output of the regression can be expressed as follows:

lwage = 5.417 + .172 exper – .007 exper2 - .003 assists + .139 black + .080 points

(.136) (.038) (.003) (.022) (.099) (.008)

n = 269, R2 = .4872

The marginal effect of the experience on the players’ annual salary is equal to = 0.158

(0.172-2*0.007). It is reasonable for us to believe that such marginal effect of the

experience on the players’ annual salary is constant in the population, since the marginal

effect (Δlwage/ Δexper) = β1 + 2β2, where the marginal effect is a constant rather than a

linear function. Thus, the result supports our belief that the marginal effect of the

experience on the players’ annual salary is constant instead of variable in the population.