“Investing in Africa’s Future”

COLLEGE OF HEALTH, AGRICULTURE & NATURAL SCIENCES

DEPARTMENT OF AGRICULTURAL SCIENCES

APPLIED EONOMETRICS: NAEC 503

September 2021

Homework One

Due: Sunday, 29 September 2021

Question 1

A justification for job training programs is that they improve worker productivity. Suppose
that you are asked to evaluate whether more job training makes workers more productive.
However, rather than having data on individual workers, you have access to data on
manufacturing firms in Harare. In particular, for each firm, you have information on hours of
job training per worker (training) and number of non-defective items produced per worker
hour (output).

a) Carefully state the ceteris paribus thought experiment underlying this policy question.
b) Does it seem likely that a firm’s decision to train its workers will be independent of
worker characteristics?
c) What are some of those measurable and unmeasurable worker characteristics?
d) Name a factor other than worker characteristics that can affect worker productivity.
e) If you find a positive correlation between output and training, would you have
convincingly established that job training makes workers more productive? Explain.

Question 2

The following table (in thousand dollars) shows the dependent variable Y representing
wages of an employee, and the independent variable X representing tuition fees paid by an
employee for obtaining a Diploma.

The model is given by: Yt = α+ βXt + ut

 Yt Xt Ût
67.71 16.67 4.15
79.14 14.09 18.84
56.64 16.50 -6.70
53.52 15.84 -8.98
62.17 16.95 -1.74
56.89 16.58 -6.55
59.34 8.51 6.11
73.42 17.25 9.13
50.95 6.15 0.17
55.99 16.20 -6.97
63.81 11.70 6.55
47.11 8.18 -5.69
53.93 16.10 -8.90
55.80 15.49 -6.26
43.99 4.28 -3.88

a) Explain why the level of education affect salary?

b) Find the OLS estimates of α and β for the proposed model and interpret the values
estimated.
c) Calculate the minimum sum of squared errors for the model.
d) If an employee pays $ 15000 for the diploma, what is his expected salary?
2
e) Estimate σ , the variance of the disturbance terms, and the variance of the estimates
of α and β.
f) Test the following hypotheses:
1. Ho: β = 0; H1: β ≠ 0
2. Ho: β = 1; H1: β > 1
3. Ho: α = 0; H1: α ≠ 0
Using a significance level of 5% and interpret your results.

Question 3

The following table shows data relating aggregate consumption expenditure in the US (US
billions US$) to aggregate disposable income X (US billions US$) for 12 years.
 Aggregate Consumption
Aggregate Disposable
Years Expenditure (US$ billions) –
Income (US$ billions) - Xi
Yi
1971 102 114
1972 106 118
1973 108 126
9174 110 130
1975 122 136
1976 124 140
1977 128 148
1978 130 156
1979 142 160
1980 148 164
1981 150 170
1982 154 178

NOTE:
Σ Yi = 1524 ΣXi = 1740 ΣXiYi = 225124 ΣYi2 = 197232 ΣXi2 = 257112

ΣUi2 = 115.28 ΣXi-X = 4812 X = 145 Y = 127

a) State the relationship between the two variables in (i) exact form (ii) stochastic form.
b) Find the value of the Marginal Propensity to Consume (MPC) for the consumption
schedule.
c) Find the value of autonomous consumption.
d) Calculate the standard errors of the MPC and autonomous consumption
2
e) Assess the goodness of fit of the regression line by calculating R and explain briefly
what it means.

Question 4

The following data relating to information collected on a random sample of banks are
presented in an anonymous manner.

Bank Profit ($ million) Credit ($ million)

1 15 140
2 18 170
3 22 196
4 20 200
5 25 230
 6 14 180
7 21 190
8 21 205
9 16 187
10 17 172

The investigator wishes to use regression analysis to find out whether bank profitability is
driven by credit.
a) Estimate the intercept and slope parameters of the regression model.
b) Calculate the goodness-of-fit.
c) Conduct hypothesis testing to inquire whether credit is a significant regressor for
profit.