Problem Set 5

Multiple Choice Questions

1. Which of the following will change if you scale the dependent variable in a simple
regression model?
(a) The p-value
(b) The t-value
(c) The R2
(d) The constant
2. When should a researcher consider transforming the explanatory variable in a
simple linear regression model?
(a) when a data plot suggests there is a non-linear functional form
(b) to get a coefficient estimate with the sign predicted by economic theory
(c) to reduce the variation in the explanatory variable
(d) to maximize SSR
3. How do you interpret the estimated value of β̂1 in the following estimated model?

ln(yi ) = β̂0 + β̂1 ln xi

(a) the slope of the line representing the relationship between y and x
(b) the elasticity of y with respect to x
(c) cannot be determined without more information
(d) the mean value of ln(yi ) when ln(xi ) = 0.
4. You have estimated a model of two variables related such that:

ln Y = 17.3 + 0.04X

If X decreases by 2 units, what is the expected change in Y ?

(a) Y increases by 8 percentage points.
(b) Y increases by 8 percent.
(c) Y increases by 4 units
(d) Y increases by 4 percent.
5. What hypothesis is tested when using the Jarque-Berra test ?
(a) H0 : The model is correctly specified as estimated
(b) H0 : The error terms are normally distributed
(c) H0 : The error terms are uncorrelated with x
(d) H0 : The error terms are random

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 6. When the residuals from a simple regression model appear to be correlated with
the explanatory variable this is known as
(a) Heteroskedasticity
(b) Autocorrelation
(c) Skewness
(d) Kurtosis
7. The symmetry of a distribution is measured by
(a) Heteroskedasticity
(b) Autocorrelation
(c) Skewness
(d) Kurtosis
8. The height of a distribution is measured by
(a) Heteroskedasticity
(b) Autocorrelation
(c) Skewness
(d) Kurtosis
9. How should βk in the general multiple regression model be interpreted?
(a) The number of units of change in the expected value of Y for a 1 unit increase
in Xk when all remaining variables are unchanged
(b) The magnitude by which Xk varies in the model
(c) The amount of variation in y explained by Xk in the model
(d) The number of variables used in the model.
10. In the following regression model

Y = β0 + β1 X + β2 X 2 + u
dY
What is dX ?

(a) β1
(b) β2
(c) β1 + β2
(d) β1 + 2β2

Analytical Questions

11. Sketch the following functional forms

(a) Y = β0 + β1 X
1


(b) Y = β0 + β1 X when β1 > 0
1


(c) Y = β0 + β1 X when β1 < 0

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 (d) Y = β0 + β1 ln X
(e) ln Y = β0 + β1 X
(f) Y = β0 + β1 X + β2 X 2
12. When forecasting using OLS, what factors influence the accuracy and the precision
of the forecast?
13. You are interested in determining the impact of experience (measured in years) on
wages (measured in pounds), and estimate four different specifications. Interpret
the coefficient on experience in each of the following:
(a) W agei = 1.20 + 0.80 ∗ Experiencei
(b) ln(W agei ) = 1.20 + 0.03 ∗ Experiencei
(c) ln(W agei ) = 1.20 + 0.2 ∗ ln(Experiencei )
(d) W agei = 1.20 + 0.80 ∗ Experiencei − 0.025 ∗ Experience2i
14. According to the estimated model in Question 13d), after how many years of
experience are wages at their maximum level?
15. You estimate the following regression model by OLS:
ˆ i=
W age 5.00 + 0.50 ∗ Agei − 0.01 ∗ Age2i − 3.00 ∗ F emale − 2.50 ∗ P arttime
(2.00) + (0.20) + (0.002) + (2.00) + (3.25)

where standard errors for each coefficient are reported in parentheses, wages are
measured in £’s, age is measured in years. F emale and P arttime are indicator
variables equal to one if the individual is a woman and works part-time respectively.
Additional information: N = 125, T SS = 1, 000 and RSS = 200
(a) Interpret the regression output
(b) After how many years of work experience do hourly wages reach a maximum?
(c) Test the hypothesis that the female dummy variable has no explanatory power
in the model at the 95% level. Test the hypothesis that the true value of the
female coefficient is -4 at the same level of significance. How do you reconcile
the two results?
(d) Test the hypothesis that the regression as a whole has no explanatory power.
16. Which of the following models do you prefer and why?
(a)
ˆ itsi =
P rof 55.00 + 0.60Salesi − 3.00Employment R2 = 0.15 R̄2 = 0.14
(25.00) + (0.10) + (2.00)

(b)
ˆ itsi =
P rof 40.00 + 0.70Salesi − 1.2 ln(Employment) R2 = 0.16 R̄2 = 0.1
(5.00) + (0.35) + (2.00)

(c)
ˆ itsi =
P rof 40.00 + 0.40Salesi + 0.1Sales2i − 0.05Sales3i R2 = 0.13 R̄2 = 0.2
(5.00) + (0.02) + (0.02) + (2.00)

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 Practical Questions

17. Download the dataset empUK.dta from the Moodle webpage. This data contains
information on hourly pay (hourpay) and other information from a sample of 12,098
British employees.
(a) Estimate the model W age = β0 + β1 Age + u and interpret the output
(b) Estimate the model ln(W age) = β0 + β1 Age + u and interpret the output
(c) Assess whether the dependent model should be measured in levels or logs
(i) By visual assessment
(ii) Assessing the distribution of the OLS residuals
(iii) Comparing the OLS residuals from the two models
(d) Generate a years of education variable using information on the age when an
individual completed full-time education (edage). [Hint: in the UK children
start school at age 5]
(e) Estimate a multiple regression model of the impact of age and years of educa-
tion on the log of hourly pay
(i) Interpret your results
(ii) Compare the results from the simple regression with the multiple regres-
sion. What has happened on the coefficient on age? Why?
(iii) What does this say about the correlation between age and years of edu-
cation?
(f) Run separate regressions for individuals in full-time jobs and individuals in
part-time jobs [Hint at the end of the regression use the syntax if part-
time==0 and if parttime==1]
(i) Explain why the standard errors on the estimate of age are different in
the two regressions
(ii) Test the hypothesis that there is no difference between the estimated
coefficients for full-timers and part-timers
(g) Introduce union status and gender as additional explanatory variables (the
variables union and f emale). Test the hypothesis that these variables are
jointly significantly different from zero in the part-time regression
(h) Add the number of children (numkids) and estimate the regression for full-
time workers. Add the age of the youngest child (agyung) and restimate the
model. Compare your results with the previous regression
(i) What has happened? Why?
(ii) How might you detect this problem before estimation?
(iii) Propose a solution
18. Consider the following aggregate production function for the US Manufacturing
Sector

Y = αK β1 Lβ2 E β3 M β4 expu

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where Y is gross output, K is capital, L is labour, E is energy, and M denotes
other intermediate materials. The data associated is called manuf.dta available on
Moodle, examine the variable labels to understand the units of measurement.
(a) We would like to estimate this model by OLS. Write down your theoretical
model.
(b) Estimate your model, and interpret the output
(c) You may recognize that the production function has the Cobb-Douglas form.
We can tell whether a cobb-douglas function exhibits constant, increasing, or
decreasing returns to scale by examining the sum of the exponents on the
individual inputs. If equal to 1 we have constant returns to scale, greater than
1 increasing returns to scale, less than 1 decreasing returns to scale.
(i) Test whether the production function displays constant returns to scale