UBEQ2023 Econometrics Jan 2022/2023

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINACE
ACADEMIC YEAR 2022/2023
TUTORIAL 5 & 6

Discussion Questions

1. The exercises below are based on the following scenario: four hundred
driver’s license applicants were randomly selected and asked whether they
passed their driving test (Passi =1) or failed their test (Passi =0); data were
also collected on their gender (Malei =1 if male and 0=if female), and their
years of driving experience (experiencei, in years). The following table
summarizes several estimated qualitative models.

Dependent variable: Pass

Probit Logit LPM
(1) (2) (3)
Experience 0.031 0.040 0.006
(0.009) (0.016) (0.002)
Constant 0.712 1.059 0.774
(0.126) (0.221) (0.034)
Note: Standard errors are reported in parentheses.

All coefficients for Experience are significance at 5% level. Using the results
in column (2) and (3):

(a) Interpret the slope estimate for experience (EXP) in linear probability
and logit models.

(b) Mathew has 10 years of driving experience. What is the probability

that he will pass the test?

(c) Christopher is a new driver (zero years of experience). What is the

probability that he will pass the test?

(d) The sample included values of Experience between 0 and 40 years,

and only four people in the sample had some 30 years of driving
experience. Out of sample, Jed is 95 years old and has been driving
since he was 16 years old. What is the model’s prediction for the
probability that Jed will pass the test? Do you think that this
prediction is reliable? Why and why not?

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UBEQ2023 Econometrics Jan 2022/2023

2. Suppose researcher has collected data from a survey on monthly

income, the number of years for education, working experience, and
gender from the selected 800 respondents. In addition, he is interested
on information about luxury car by asking the question “Did you own
a luxury car?”

(a) Based on situation above, suggest and state ONE (1)

appropriate regression model.

(b) He intends to compute the conditional probability of owning a

luxury car for respondents that have monthly income more
than RM5,000. Based on the 800 selected respondents, he has
found that there are 500 respondents with monthly income
more than RM5,000 and 300 respondents with monthly income
lesser than RM5,000. Knowing this, he has obtained the
natural logarithms of odds ratio of respondent who owns a
luxury car at -1.5 with income more than RM5,000. Interpret
this value.

3. Consider the following model for the probability of being a union member.

UNION i =β0 + β 1 EXPi + β2 EXP 2 + β 3 SCHOOLi + β 4 SECTOR i + ε i

i
(Model 1.1)

Let
Unioni be a binary response variable taking the value one if individual i
is a member of a labour union and zero otherwise. For each individual we
have observed the following four characteristics:

EXPi = Years of experience on the labour market.

SCHOOLi = Years of schooling.
SECTOR i = Dummy variable for whether the individual works in a highly
unionized sector.

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UBEQ2023 Econometrics Jan 2022/2023

The estimated results for three different binary choice models for Union are
reported in Table 2.

Table 2: Binary Choice Models for Union

Variable LPM Logit Model Probit Model
0.2020 -3.5845 1.5566
Constant
(1.26) (-3.49) (-4.04)
EXPi 0.0521 1.1558 0.0996
(5.05) (2.66) (4.66)
EXP 2 -0.0005 -0.0036 -0.005
i (-3.33) (-3.66) (-4.66)
SCHOOLi -0.0234 -0.0336 -0.0906
(-2.22) (-6.33) (-6.99)
SECTOR i 0.2255 0.9955 0.6644
(0.96) (2.99) (3.64)
Note: t-statistics are reported in parentheses.

(a) Interpret slope estimate for experience (EXP) in the following models:

(i) Linear Probability Model (LPM)

(ii) Logit Model

(iii) Probit Model

(b) Using Logit model, does the probability of joining the Union depends
on the years of schooling? Explain.

(c) Based on the results of three models shown in Table 2, what is the
probability that an individual works in a highly unionized sector with
5 years working experience and 15 years of schooling?