15 October, 2010

Mid-term Exam 2

Subject: Econometrics
Time: 90 minutes

This is an open-book exam.

1. The following model was estimated to test for gender bias in management
positions:
^
Wage=−122+90.4 edu+ 43 exp−113 F
The variables are: Wage = wages of managers per month ($); edu = the number of
years of education (high-school degree = 12, bachelor = 16 years, etc); exp =
experience of the workers (in years); F : dummy variable, which takes the value 1 if
the individual is female and 0 otherwise.
a. What is the estimated starting salary for a female manager who has just
completed her master degree (Master degree is an additional 2 years past
bachelor degree)?
Wage of a female manager = -122 + 90.4*14 – 113 (assuming no experience)
b. What is the starting salary for a male manager who has just completed his
master degree?
Wage of a male manager = -122 + 90.4*14 (assuming no experience)

2. The following model was estimated:

^
Wage=−4.85+ 9.30 edu+1.67 exp−3.2 fe−0.039 expsq
where wage is measured in $ per hour, ed is the number of years of education, exp is
the years of experience, expsq is experience squared, and fe is 1 if the person is
female, 0 is male.
a. Determine the partial effect of experience on wage for a male worker with 8
years experience.
∂wage
=1.67−2∗0.039 exp=1.67−2∗0.039∗8
∂exp
b. Determine the partial effect of experience on wage for a female worker with 8
years of experience
∂wage
=1.67−2∗0.039 exp=1.67−2∗0.039∗8
∂exp
However, in the case
^
Wage=−4.85+ 9.30 edu+1.67 exp−3.2 fe−0.039 expsq +0.05 fe∗exp
The partial effect of experience for males is different from the one for females:
∂wage
( male )=1.67−2∗0.039 exp+0.05 fe=1.67−2∗0.039∗8
∂exp
∂wage
( female ) =1.67−2∗0.039 exp+0.05 fe=1.67−2∗0.039∗8+ 0.05
∂exp

3. Comment on the following statement: multi-collinearity is analogous to having too

small a sample.
Multicollinearity exists if there is almost( but not exactly) a perfect linear relationship
amongst the regressors. We know that unless there is perfect multicollinearity, OLS
estimators are still BLUEs. Since the consequences of small sample size and
insufficient variability in the explanatory variables are the same as multicollinearity,
they are essentially the same problem. Consequences include
 The variances and standard errors of the estimates in any specific sample are
relatively large, making precise estimation difficult
 This will imply large confidence intervals, leading to accepting a null
hypothesis more readily
 This will also lead to insignificant t-ratios

4. Consider the following equation:

y i=β 0 + β 1 x i + β 2 m i + β 3 f i + μi ,
Where y is earnings, x is education, m is the mother’s education, and f is the father’s
education (all measured in number of school years). Explain a simple t-test
procedure, (that does not require more information than what’s produced by default
by Stata), by which you can test the hypothesis that the mother’s and the father’s
education have the same effect on earnings.
Test H1: β 2=β 3
β 2 , β 3 have the same sample sizes (that is, the number, n, of participants of each
group). It can be assumed that the two distributions of β 2 ,¿ β 3 have the same

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variance. The t statistic to test whether means are different can be calculated:

β́ 2− β́ 3
s 2β + s 2β
t=
s
β ,β
2
2
n3
where
√
sβ , β =2 3
2 √ 2 3

Here s β is the standard deviation of mother’s education, s β is the standard deviation

2 3

of father’s education.
t statistic will be compared to the critical value at a specific significance level (5% or
1%) with n−k degree of freedom. If t ←t critica l ∨t>t critical , we reject H1.

5. Explain why R2 is between 0 and 1.

See text book

6. Consider the following regression results on a large cross-sectional sample of

employees:
log ( wagei )=9.6 ( 0.03 )+ 0.25 ( 0.02 ) woman+ 0.15 ( 0.01 ) edu+0.016 ( 0.01 ) exper−0.0002(0.0001) exper 2
where woman is a dummy, edu is completed education in years, and exper is labor
market experience in years. Standard errors are in brackets.
a. What is the meaning of the intercept?
Log (wage) of a man with no education, no experience, other factors being
constant
b. What is the meaning of the coefficient on education?
Other things held constant, 1 year of education more increases log(wage) by
0.15
c. What is the gender difference in earnings among people with 12 years of
education and 0 labor market experience?
Women have higher log(wage) than men by 9.6 +0.25+0.15*12
d. Does the gender difference increase, decrease or not change with education?
No
e. Does the gender difference increase, decrease or not change with
experience? No
f. What is the return to education for men (possibly a function of other
variables)?
∂log ⁡(wage)
=0.15+0.016 exper−0.0002 exper 2
∂edu
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g. What is the return to education for women (possibly a function of other
variables)?
∂log ⁡(wage)
=0.25+0.15+ 0.016 exper−0.0002exper 2
∂edu
h. What is the return to experience for men (possibly a function of other
variables)?
∂log ⁡(wage)
=0.15 edu+0.016−2∗0.0002 exper
∂exp

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