Basic Econometrics

Problem Set I

(1) Consider the following Population Regression Functions:

Model I: Yi = b1 + b2*Xi + ui
Model II: Yi = a1 + a2*(Xi – X ) + ui

(a) Find the estimators of b1 and a1. Are they identical? Are their variances identical?
(b) Find the estimators of b2 and a2. Are they identical? Are their variances identical?
(c) What is the advantage, if any, of model II over model I?

(2) Does the regression line yi = b1 + b2*xi + ui , where xi = (Xi – X ) and yi = (Yi – Y ),pass
through the origin? Explain.

(3) Can the coefficient of determination in a simple linear regression model without an intercept
term be negative? Explain.

(4) Using a Monte Carlo experiment, how would you test the hypothesis that the OLS estimator
of the slope coefficient in the simple linear regression model is unbiased?

(5) Which of the following can cause OLS estimators to be biased?

(a) Heteroscedasticity
(b) Omitting an important variable
(c) A sample correlation coefficient of 0.95 between two independent variables both
included in the model.

(6) In the model Yi = b1 + b2*Xi + ui, show that the OLS estimator of the slope parameter is
efficient.

(7) Show that the OLS estimators of the intercept and slope parameters in the simple linear
regression are consistent.

(8) In the model Yi = b1 + b2*Xi + ui, where the errors are normally distributed, show that the
ML estimator of the error variance is biased.

(9) Explain whether the following are true, false, or uncertain:

(a) The t-test requires that the sampling distributions of the OLS estimators b̂1 and b̂2 follow the
normal distribution.
(b) The p-value and the size of a test statistic mean the same thing.
(c) If a null hypothesis is not rejected, it is true.