20211231 Final Exam

Name: 潘氏春瓊 (Quinn)

Student ID: 11096020

Appendix: Econometric Lab #4

Step 1: Review the Literature

Step 2: Estimate the Basic Model

a.
^
SALEPRICE =0.0065 HORSEPOWER i−0.0275 AGE AGE i−0.00002 ENGHOURSi +0.4991 DIESELi +0.356

b. The result of the adjusted R-squared is: 68,5662%. I think the result is reasonable
because 68,5662% observations can be explained by the model’s inputs and 31,4338%
can be explained by other variables outside the model and random errors.

c. All the coefficients follow the expected signs in table 7.3

d. Df = N – K – 1 = 276 – 10 – 1 = 265
The level of significant: α = 5% = 0.05

The critical value is: tc = t0.05, 266 = 1.6506

horsepower:
Null and alternative hypotheses:
H0: β1 ≤ 0;
HA: β1 > 0
Reject H0 if tk > t0.05,266
t1 = 15.614 > tc => Reject H0, there is not enough evidence to infer HA:β1 > 0
age:
Null and alternative hypotheses:
H0: β2 ≥ 0;
HA: β2 < 0
Reject H0 if tk < - t0.05,266
t2 = -6.17517017 < tc => Do not reject H0, there is not enough evidence to infer HA:β2 < 0

enghours:
Null and alternative hypotheses:
H0: β3 ≥ 0;
HA: β3 < 0
Reject H0 if tk < - t0.05,266
t3 = -1.78749441 < - tc => Reject H0, there is enough evidence to infer HA: β3 < 0

diesel:
Null and alternative hypotheses:
H0: β2 ≤ 0;
HA: β4 > 0
Reject H0 if tk > t0.05,266
t4 = 4.17309413 > tc => Reject H0, there is enough evidence to infer HA: β4 > 0

fwd:
Null and alternative hypotheses:
H0: β2 ≤ 0;
HA: β5 > 0
Reject H0 if tk > t0.05,266
t5 = 4.90912344 > tc => Reject H0, there is enough evidence to infer HA: β5 > 0

manual:
Null and alternative hypotheses:
H0: β6 ≥ 0;
HA: β6 < 0
Reject H0 if tk < - t0.05,266
t6 = -1.57123247 > tc =>Do not reject H0, there is not enough evidence to infer HA:β6 < 0

johndeere:
Null and alternative hypotheses:
H0: β7 ≤ 0;
HA: β7 > 0
Reject H0 if tk > t0.05,266
t7 = 1.93424201 > tc => Reject H0, there is enough evidence to infer HA: β7 > 0
e. It means if the tractor is manufactured by John Deere (=1), the price of the tractor will
increase by 0.172534 unit. In another way, if it is not produced by John Deere (=0), the
saleprice will not change.

f. There is no problem with the basic model.

Step 3: Consider a Polynominal Functional Form for Horsepower

a.

b. Df = N – K – 1 = 276 – 11 – 1 = 264
The significant level is: α = 5% = 0.05

The result is: t0.05,264 = 1.65065

horsepower:
Null and alternative hypotheses:
H0: β1 ≤ 0;
HA: β1 > 0
Reject H0 if tk > t0.05,266
t1 = 15.4991 > tc => Reject H0, there is enough evidence to infer HA:β1 > 0
 sq_horsepower:
Null and alternative hypotheses:
H0: β2 ≥ 0;
HA: β2 < 0
Reject H0 if tk < - t0.05,266
t2 = - 0.9464 < - tc => Reject H0, there is enough evidence to infer HA: β2 < 0
c. The quadratic equation of Y = f(X) (X = HORSEPOWER), other things being
equal is:
Y = 0.0150856X – 0.0000208X2
The slope of Y with respect to horsepower is:
ΔY
f’(X) = = 0.0151 – 0.0000416X
ΔX
The value of a tractor reaches an extreme when:
0.0150856
f’(X) = 0 <=> X (HORSEPOWER) = = 362.6346
0.0000416
f (362.6346) = 2.7353

Because β1 > 0; β2 < 0 so the extreme point will be maximum at X (362.6346;

2.7353)

d. I prefer the polynominal equation. Because the coefficients of horsepower

devided by square_horsepower nearly equal to 330 which means the price of a
tractor is affected more by horsepower, but at some point if the price is too high
that will affect buyer demand. When demand decreases, the price will also
decrease, so the square of horsepower is added to the equation to ensure that
prices fall at some point to be able to rise consumer demand.

Step 4: Add a Potential Omitted Variable to Your Step 3 Model

a.
 b. By comparing the two results above, applying four specification criteria for the
inclusion of “cab” variable:
1. Theory: cab should have been included in the model, their logical justification
is clearly strong.
2. t-Test: the t-score of the new variable, tractor has enclosed cab, accounted for
6.796, which around 3.5 times more than 2.0 (the greatest level)

Null and hypothesis test:

H0: β1 ≤ 0
HA: β1 > 0
Reject H0 if t1 > tc
t1 = 6.7961 > tc => Reject H0, there is enough evidence to infer that: HA:β1 > 0
3. R 2: R 2 increases when the variable is dropped, indicating that the variable is
irrelevant.
4. Bias: The remaining coefficients changed only a small amount when cab is
dropped and the functions of all used variables stay remain, suggesting that
there is little – if any – bias caused by excluding the variable.

Based on the analysis, it is concluded that cab is irrelevant and should be dropped
from the model.

Step 5: Joint Hypothesis Testing

 The result of the basic model in step 2

a. autumn is the omitted condition in this seasonal model. I think the strange is
summer because farmers usually use tractor to do agricultural tasks such as:
tillage, ploughing and planting in fields which take place mostly in spring, autumn
and winter. Besides, to prepare for the agricultural work, farmers have to buy
tractor before farm progress is coming. Therefore, I suppose the coefficients of
summer, autumn and winter are positive, whereas it is negative in spring. But
looking at the result of the regression equation, the function of summer for
saleprice is indicated negative.
b. State null and alternative hypothesis:
H0: β8 = β9 = β10 = 0;
H1: at least one βj ≠ 0, j = 8; 9; 10
c. The result of the regression equation without time variables is shown in table
below:
 ^
SALEPRICE =0.0066 HORSEPOWER i−0.0278 AGE AGE i−0.000022 ENGHOURSi + 0.4884 DIE

d. Run the appropriate F-test with the level of significance (alpha) = 5% = 0.05
 F-value = 1.09008

Using ANOVA analysis and get the result:

 Input dfn = 3, dfd = 266 in gretl and get the result of critical value of the F-test:
F(3,266) = 2.63854

e. Because the F-value is well below the Critical value, so cannot reject H 0, there is
not enough evidence to conclude that price of the used tractor has no seasonal
pattern. However, the spring, summer and winter variable also have a slight
impact on the tractor’s price because its t-ratio are less than ± 2.

Step 6: Consider a Slope Dummy That Interacts Diesel with Use

I create a new column in Excel with its data is calculated by enghours*diesel and run the
regression
^
SALEPRICE =0.0065 HORSEPOWER i−0.0278 AGE i−0.000033 ENGHOURS i+ 0.4667 DIESELi+ 0.3578 FW

To identify the relationship between diesel and enghours, we focus on 3 factors as the
following formula:

^
SALEPRICE =β 0−0.000033 ENGHOURSi +0.4667 DIESEL i+ 0.000013 ENGHOURSDIESEL i+ ɛ

The critical value of t-test is: tc = t0.05,264 = 1.65065

Since diesel is a dummy variable, so we will calculate that:

 If diesel = 0 => ^
SALEPRICE =β 0−0.000033 ENGHOURSi + ɛ

 If diesel = 1 => ^
SALEPRICE =β 0−0.0000 2 ENGHOURS i +0.4667+ ɛ