ECONOMETRICS

TUTORIAL 2 SOLUTIONS

Fall session
 EXERCISE 1
Consider the following data

Indvidual 1 2 3 4 5
X=Years of Education (in years) 11 14 12 16 12

Y=Job Tenure (in years) 1 6 8 10 5

1) 2)
1 5 1 5 2
Cov  X , Y     X iYi   XY Var  X    X i  X 2
5 i 1 5 i 1
5

  X iYi  411
5

i 1
 i  861
X 2

i 1
5
1
X 
5 i 1
X i  13
861
Var  X    132  3.2
1 5
Y   Yi  6 5
5 i 1
411
Cov  X , Y    13  6   4.2
5
 3)The fitted regression equation Yˆi  ˆ1  ˆ2 X i

ˆ cov  X , Y  4.2
2    1.3125
var  X  3.2
ˆ1  Y  ˆ2 X  6  1.3125  13  11.0625

Yˆi  11.0625  1.3125 X i

• If X (Years of Education) were equal to 0 then Y (Job Tenure) = -11. 0625

years.

• If X (Years of Education) increases by 1 unit (one year) then Y(Job

Tenure) will increase by 1.3125 year.
4) The residuals are the difference between the actual values and the fitted valueseˆi  Yi  Yˆi

i X Yˆ Y ê
1 11 3.375 1 -2.375
2 14 7.3125 6 -1.3125
3 12 4.6875 8 3.3125
4 16 9.9375 10 0.0625
5 12 4.6875 5 0.3125
Yˆ1  11.0625  1.3125  X 1 

Yˆ1  11.0625  1.3125 11  3.375

ê1  Y1  Yˆ1
eˆ1  1  3.375  2.375
 5) The coefficient of determination

   
5 5


2 2
Yˆi  Y Yˆi  6
ESS
R2   i 51  i 1
5

 Y  Y   Yi  6 
TSS 2 2
i
i 1 i 1

 
5 2
Yˆi  Y  27.56
i 1

 Y  Y 
5 2
i  46
i 1

27.56
R  2
 0.5991 0.6
46
60% of the variation of Y (job tenure) is explained by the regression
EXERCISE 3
yi  1   2 xi  ei
y: Tractor’s maintenance costs x: Tractor’s age (in months)
1) a) 15

  x  x  y
i i  y
47999.33
ˆ2  i 1
15
  12.787
 x  x 
2 3753.73
i
i 1
If age increases by 1 month then the maintenance costs of the tractor will
increase by 12.787 dinars.
15

x
15

y 9380 i i
362
ˆ1  y  ˆ2 x, x   24.13
i 1
y i 1
 625.33 and
15 15 15 15
ˆ1  625.33  12.787  24.13  316.78
If age is equal to 0, then the maintenance costs of the tractor would be equal to
316.78 dinars.
The fitted regression equation yˆi  316.78  12.787 xi
b)   yˆ  y 
15 2
i
ESS
R  2
 i 1

 y  y
15
TSS 2
i
i 1

  yˆ  y       
15 2 15 2

i ˆ1  ˆ2 xi  y
i 1 i 1

  
15 2
 y  ˆ2 x  ˆ2 xi  y
i 1

   ˆ x  ˆ x 
15 2
2 i 2
i 1
15
 ˆ   xi  x 
2 2
2
i 1

 
15 2
yˆi  y  12.787 2  3753.73  613762.52
i 1

ESS 613762.52
R 
2
  0.9789
TSS 626973.33
c) The estimate of the standard error of the regression

RSS
ˆ 
n2
TSS  ESS

n2

626973.33  613762.52

13

 31.88
d) The estimate of the standard error of the slope
ˆ 2
 
se ˆ2  15

 x  x 
2
i
i 1

31.882

3753.73

 0.520
2) A 95% confidence interval for the slope

  
CI 95%   2    ˆ2  t0.025,n2  se ˆ2 


ˆ2  12.787

t0.025,13  2.160

 
se ˆ2  0.520

CI 95%   2   12.787  2.160  0.520  11.664,13.91

3)
H 0 : 2  0

 H1 :  2  0

ˆ2   2 12.787
   24.59
 
tcal
ˆ
se  2 0.520

ttab  t0.025,13  2.160

tcal  ttab

Reject H 0 , 2 is significant at 5% level

 4)
 H 0 :  2  15

 H1 :  2  15 ˆ2   2 12.787  15
   4.256
 
tcal
ˆ
se  2 0.520
CI 95%   2   11.664,13.91 or
ttab  t0.025,13  2.160
15  CI 95%   2 
tcal  ttab

Reject H 0

The new value does not confirm the results. So, a value from the confidence
interval that contains the possible values of  2 could be chosen
5)
H 0 : 2  0

 H1 :  2  0
tcal  24.590

t0.05,13  1.771

tcal  ttab

Reject H 0 , the maintenance cost is an increasing function of tractor’s age.

6) Age=4 years=4*12=48 months (The unit here is months).

 
CI  yF    yˆ F  t  se  yˆ F   Where
,n 2
 2 
yˆ  ˆ  ˆ x
F 1 2 F

 xF  x 
2
1
And se  yˆ F   ˆ  1   15

 x  x 
n 2
i
i 1

yˆ F  316.78  12.787  48  930.556

1  48  24.13
2

se  yˆ F   31.88  1    35.19
15 3753.73

CI 95%  yF   930.556  2.160  35.19  854.55,1006.5

 EXERCISE 4
1) Reˆ nt  50  100.8  Pr op.Student n  29 ; R 2  0.250
(0.25) (50.4)
a)
If Prop.Student=0 then, Rent=50
If the proportion of students increases by 1%, rent increases by 100.8.
b)
H 0 : 2  0

 H1 :  2  0
 
se ˆ2  50.4, n  29, t0.05,27  1.703
ˆ2   2 100.8
  2
 
tcal
se ˆ2 50.4
tcal >1.703
Reject H 0
c) The 90% confidence interval for the slope coefficient

  
CI 90%   2    ˆ2  t0.05,n2  se ˆ2 


 100.8  1.703  50.4

 14.969,186.631
2)
Inflationi  1   2 Interest Ratei  ei
a)
ˆ cov  x, y  25
2    0.5
var  x  50
If interest varies by 1% then inflation varies by (-0.5%)
ˆ 2
 
se ˆ2  n

  xi  x 
2

i 1

ˆ 2

n  var  x 

RSS 49
ˆ 
2
  0.5
n  2 100  2

So, se ˆ
 2  
 0.5 
   0.01
 100  50 
 b) n=1000
RSS 49
ˆ 
2
  0.049
n  2 1000  2

 
ˆ  0.049 
se  2     0.00098
 1000  50 

The increase in sample size leads to a fall of the standard error of the slope

c) Var  x   5, n=100

ˆ 2
 
se ˆ2 
n.var  X 

0.5
100  5
 0.0316

A fall in variance of the dependent variable leads to a rise in the standard error
of ̂
2
d)
 H 0 :  2  0.3

 H1 :  2  0.3

ttab  t0.025,98  1.96

ˆ2   2 0.5   0.3

   20
 
tcal
se ˆ2 0.01

tcal  ttab

Reject H 0 . The decision of the central bank is not good

e)
 
CI  yF    yˆ F  t se  yˆ F  
,n 2
 2 

 xF  x 
2
1
se  yˆ F   ˆ  1   15

  xi  x 
n 2

i 1

yˆ F  0.1   0.5   0.09  0.055

 0.09  0.17 
2
1
se  yˆ F   0.5  1    0.714
100 100  50

CI  yF    0.055  1.96  0.714   1.344,1.454