PS I

1.
Proof:
𝑛 𝑛 𝑛 𝑛

∑(𝑥𝑖 − 𝑥̅ )(𝑦𝑖 − 𝑦̅) = ∑[𝑥𝑖 (𝑦𝑖 − 𝑦̅) − 𝑥̅ (𝑦𝑖 − 𝑦̅)] = ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅) − ∑ 𝑥̅ (𝑦𝑖 − 𝑦̅)
𝑖=1 𝑖=1 𝑖=1 𝑖=1
𝑛 𝑛 𝑛 𝑛 𝑛

= ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅) − 𝑥̅ ∑(𝑦𝑖 − 𝑦̅) = ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅) − 𝑥̅ [(∑ 𝑦𝑖 ) − (∑ 𝑦̅)]

𝑖=1 𝑖=1 𝑖=1 𝑖=1 𝑖=1
𝑛 𝑛 𝑛

= ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅) − 𝑥̅ (𝑛𝑦̅ − 𝑛𝑦̅) = ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅) − 0 = ∑ 𝑥𝑖 (𝑦𝑖 − 𝑦̅)

𝑖=1 𝑖=1 𝑖=1
Q.E.D.

2.
3.

(v). Denote the new OLS formula as

1 1
̂ ′ = 𝛽̂
𝑏𝑤𝑔ℎ𝑡 ′ ̂′ ′
0 + 𝛽1 𝑐𝑖𝑔𝑠, where 𝑏𝑤𝑔ℎ𝑡 = 𝑏𝑤𝑔ℎ𝑡, ̂′=
and 𝑏𝑤𝑔ℎ𝑡 ̂ .
𝑏𝑤𝑔ℎ𝑡
0.035 0.035
Then
1 1 1
̂′=
𝑏𝑤𝑔ℎ𝑡 ∗ (119.77 − 0.514𝑐𝑖𝑔𝑠) = ∗ 119.77 − ∗ 0.514 ∗ 𝑐𝑖𝑔𝑠
0.035 0.035 0.035
= 3422 − 14.69𝑐𝑖𝑔𝑠
Then 𝛽̂′ ̂′
0 = 3422 and 𝛽1 = −14.69.

(vi). Denote the new OLS formula as

̂ =𝛽
𝑏𝑤𝑔ℎ𝑡 ̂ ̂
̃0 + 𝛽
̃1 𝑐𝑖𝑔𝑠
̃, where 𝑐𝑖𝑔𝑠
̃=
1
𝑐𝑖𝑔𝑠.
20
Then
̂+𝛽̂𝑐𝑖𝑔𝑠 ̂ ̃ ̂ 1 ̂+(1 𝛽
̂) 𝑐𝑖𝑔𝑠
̂ =𝛽
𝑏𝑤𝑔ℎ𝑡 ̃0
̃ ̃
1 ̃ = 𝛽0 + 𝛽1 ∗ (
̃
𝑐𝑖𝑔𝑠) = 𝛽0
̃
20 20 1
̂
̃0 = 𝛽
𝛽 ̂
̂0 , and 𝛽
̃1 = 20𝛽
̂1
̂ = 119.77 and 𝛽
̃
Then 𝛽 ̂ = −10.28.
̃
0 1
4.