ETF2100/9100 Introductory Econometrics

Tutorial exercises for week 6: The Multiple Regression Model

Solution
Question 1
Consider PoE question 5.4 where our interest is on the model relating the proportion of a
household’s budget spent on transportation WTRANS on the log of total expenditure
ln ( TOTEXP ) , age of the household head AGE , and number of children NK .

WTRANS = β1 + β2 ln ( TOTEXP ) + β3 AGE + β4 NK + e

The data are in the file london.xlsx and contains 1519 households drawn from the 1980-1982
British Family Expenditure Surveys. Data have been selected to include only households with
one or two children living in Greater London. Estimate the above model.
(a) We would expect β2 to be positive as household become richer they may spend more
on transport by using more luxurious forms of transport and therefore the proportion
of budget for transport increases.
The expected sign for β3 is not clear. For a given level of total expenditure and a
given number of children, it is difficult to predict the effect of age on transport share.
The expected sign for β4 is also not clear. It can be negative if adding more children
to the household increases expenditure on other things (such as food and clothing)
more than it does on transportation. Alternatively, having more children may lead to
making more trips and increasing transport budget.
(b) The Scatter plots:
(i) For WTRANS and TOTEXP

There seems to be a weak positive relationship between budget share on transport

(WTRANS) and total expenditure (TOTEXP). The plot seems to suggest some positive
correlation between the two variables.
(ii) For WTRANS and AGE

We also notice some weak correlation between WTRANS and AGE. However, it is not very
clear whether there is positive or negative relationship.

(III) For WTRANS and NK

It is not very clear whether there is positive or negative relationship, but seems to have weak
negative relationship.
(c) Report the results in the standard format and discuss your results.
The estimated equation is
=
WTRANS −0.0315 + 0.0414 ln (TOTEXP ) − 0.0001AGE − 0.0130 NK R2 =0.0247
( 0.0322 ) ( 0.0071) ( 0.0004 ) ( 0.0055) ( se )

(d) Interpret the estimates b2 , b3 and b4 . Do you think the results make sense from a
logical point of view?
The b2 = 0.0414 suggests that if TOTEXP increases by 1% the budget proportion for
transport increases by 0.0004. The positive sign for b2 is according to what our expectation.

The b3 = −0.0001 suggests that as the age for the household head increases by 1 year the
budget share for transport decreases by 0.0001.
The b4 = −0.013 implies that an additional child decreases the budget share for transport by
0.013.

(e) Are there any variables that you might exclude from the equation? Why?
The variables that we may exclude from the model are the variables that do not have impact
on the budget share for transport. To find out we need to perform hypothesis tests for the
significance of the coefficients where the null is of the form H 0 : βk =0 . We reject H 0 if the
p-value is less than α , level of significance. Based on the EViews output for the estimation
we found that the p-value for testing H 0 : β3 =0 against H1 : β3 ≠ 0 is 0.869. In this case we
do not reject H 0 and conclude that AGE could be exclude from the equation.

(f) Find 95% interval estimate for β2 . Interpret the results.

95% interval estimate for β2 = b2 ± tc se ( b2 )

Reading from EViews output b2 = 0.0414 and se ( b2 ) = 0.0071 .

Using α==0.05 , tc t0.975,

= = df 1519 − 4 1.96 (approximating this value by using degrees of
freedom equal ∞ from t-table ).
95% interval estimate for β2 = 0.0414 ± 1.96 × 0.0071

= ( 0.0275, 0.0553)

We are 95% confident that as TOTEXP increases by 1% the budget proportion for
transport can increase between 0.000275 to 0.0055.

(g) Commodities are regarded as luxuries if β2 > 0 and necessities of β2 < 0 . Test
H 0 : β2 ≤ 0 against H1 : β2 > 0 and comment on the outcome.
b2
The test statistic is t = ~ tdf = N − K =1515
se ( b2 )
 This is the right tail test. Using α =
= =
0.05 , tc t0.95,
= df 1519 − 4 1.645 (approximated
using df = ∞ ).
0.0414
The calculated =
t is t * = 5.8309 .
0.0071
Since t * > t0.095,1515 we reject H 0 and conclude that the data suggest that transportation
is regarded as luxury.

(h) What proportion of variation in the budget proportion allocated to transport is

explained by this equation?
The proportion of variation in the budget proportion allocated to transport explained by this
equation is 0.0247.

(i) Predict the proportion of a budget that will be spent on transportation for one-child
and two-children households, when total expenditure and age are set at their sample
means.
The sample means for TOTEXP and AGE are 98.7 and 36, respectively.
For one-child households, the predicted budget proportion is
 =−0.0315 + 0.0414 × ln ( 98.7 ) − 0.0001× 36 − 0.013 ×1 =0.1420
WTRANS 0

For two-children households, the predicted budget proportion is

 =−0.0315 + 0.0414 × ln ( 98.7 ) − 0.0001× 36 − 0.013 × 2 =0.129
WTRANS 0