Quiz 1

Econometrics II
BSc-IV
Lahore School of Economics
SOLUTION
Name: ______________________ Section: _____
Total Marks: 30 marks
Two seniors decided to build a model to help them decide whether to live on campus or not.
They collected data from 533 upper-class students (first-year students were required to live on
campus) and estimated the following equation using the Logit Model:

𝐿: Pr(𝐷𝑖 =̂
1) = 𝐹(3.26 + 0.03𝑈𝑛𝑖𝑡𝑖 − 0.13𝐴𝑙𝑐𝑜𝑖 − 0.99𝑌𝑒𝑎𝑟𝑖 − 0.39𝐺𝑟𝑒𝑘𝑖 )
(0.04) (0.08) (0.12) (0.21)
N=533; Pseudo R2= 0.43
Where:
𝐷𝑖 = 1 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑙𝑖𝑣𝑒𝑑 𝑜𝑛 𝑐𝑎𝑚𝑝𝑢𝑠, 𝑜 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒.
𝑈𝑛𝑖𝑡𝑖 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑐𝑎𝑑𝑒𝑚𝑖𝑐 𝑢𝑛𝑖𝑡𝑠 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑡𝑎𝑘𝑖𝑛𝑔
𝐴𝑙𝑐𝑜𝑖 = 𝑡ℎ𝑒 𝑛𝑖𝑔ℎ𝑡𝑠 𝑝𝑒𝑟 𝑤𝑒𝑒𝑘 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 𝑎𝑙𝑐𝑜ℎ𝑜𝑙
𝑌𝑒𝑎𝑟𝑖 = 2 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑎 𝑠𝑜𝑝ℎ𝑚𝑜𝑟𝑒, 3 𝑖𝑓 𝑎 𝑗𝑢𝑛𝑖𝑜𝑟, 𝑎𝑛𝑑 4 𝑖𝑓 𝑎 𝑠𝑒𝑛𝑖𝑜𝑟
𝐺𝑟𝑒𝑘𝑖 = 1 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑎 𝑚𝑒𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎 𝑓𝑟𝑎𝑡𝑒𝑟𝑛𝑖𝑡𝑦, 0 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒.
a. Interpret the estimated coefficients of 𝐴𝑙𝑐𝑜 and 𝐺𝑟𝑒𝑘. (4 marks)
If a student spends one more night during the week consuming alcohol then the log of the odds
ratio decreases by 0.13 units, ceteris paribus.

If a student is a member of a fraternity the log of the odds ratio will be 0.39 units lower as
compared to a student who is not a member of a fraternity, ceteris paribus.

b. What is the difference in the predicted probability of living on campus of a sophomore

student who is a member of a fraternity and a sophomore student who is not a member of
a fraternity given that both students do not consume alcohol throughout the week and take
3 academic units? (6 marks)
1
= 0.7271
1+ 𝑒 −(3.26+0.03∗(3)−0.13∗(0)−0.99∗(2)−0.39∗(1))
1
= 0.7974
1+ 𝑒 −(3.26+0.03∗(3)−0.13∗(0)−0.99∗(2)−0.39∗(0))

=0.7271-0.7974
=-0.0703 or -7.03%
The same equation was estimated using the Linear Probability Model to compare the results with
the logit estimates. The following is the estimated equation:
 ̂
𝐿: Pr(𝐷𝑖 = 1) = 0.815 + 0.008𝑈𝑛𝑖𝑡𝑖 − 0.033𝐴𝑙𝑐𝑜𝑖 − 0.248𝑌𝑒𝑎𝑟𝑖 − 0.098𝐺𝑟𝑒𝑘𝑖
(0.05) (0.10) (0.02) (0.24)
N=533; R2= 0.67

c. Why is the Logit Model preferred over the Linear Probability Model in the case of a binary
dependent variable? (2 marks)
Refer to the lecture slides.

d. Explain how the Logit Model is able to overcome the problem posed by the LPM
̂𝑖 = 1̂ . (4
mentioned in part (c) using the equation for the estimated probability, 𝑃 −𝑌𝑖
1+𝑒
marks)

e. Using the estimates for the LPM, provide an economic interpretation for the variables 𝐴𝑙𝑐𝑜
and 𝐺𝑟𝑒𝑘. (4 marks)
If a student spends one more night during the week consuming alcohol then the probability
of the student living on campus decreases by 3.3%, ceteris paribus.

If a student is a member of a fraternity then the student has a 9.8% lower chance of living
on campus as compared to a student who is not a member of a fraternity, ceteris paribus.

The two seniors also estimated the same equation using the Probit Model.
𝐿: Pr(𝐷𝑖 =̂1) = 𝜑(2.04 + 0.019𝑈𝑛𝑖𝑡𝑖 − 0.081𝐴𝑙𝑐𝑜𝑖 − 0.62𝑌𝑒𝑎𝑟𝑖 − 0.24𝐺𝑟𝑒𝑘𝑖 )
(0.04) (0.08) (0.12) (0.21)
N=533; Pseudo R2= 0.45
f. Interpret the estimated coefficients of 𝐴𝑙𝑐𝑜 and 𝐺𝑟𝑒𝑘. (4 marks)
 The z-score decreases by 0.081 points if a student spends one more night during the week
consuming alcohol, ceteris paribus.

If a student is a member of a fraternity the z-score will be 0.24 units lower as compared to
a student who is not a member of a fraternity, ceteris paribus.

g. Using the estimated equation for the Probit Model, what is the difference in the predicted
probability of living on campus of a sophomore student who is a member of a fraternity
and a sophomore student who is not a member of a fraternity given that both students do
not consume alcohol throughout the week and take 3 academic units? (6 marks)

𝑃𝑟(Y = 1|X) = Φ(2.04 + 0.019 ∗ (3) − 0.081 ∗ (0) − 0.62 ∗ (2) − 0.24 ∗ (1)) = Φ(0.617) = 0.2324

𝑃𝑟(Y = 1|X) = Φ(2.04 + 0.019 ∗ (3) − 0.081 ∗ (0) − 0.62 ∗ (2) − 0.24 ∗ (0)) = Φ(0.857) = 0.3051
=0.3051-0.2324

=-0.0727 or -7.27%