ECON 330 – Problem Sets

For Exam 1
Chapter 2 (Simple Linear Regression)
Question 1 (8 marks)
The output shows the result of regressing the weight of the respondent, measured in pounds,
on his or her height, measured in inches. The intercept term is stated as _cons. The slope and
intercept estimates are given under the Coef. column.

i) Provide an interpretation of the slope and intercept coefficients. Do these estimates

look reasonable to you? (2 marks)
ii) How would your interpretation of the slope coefficient change if both variables were
in logarithm form? (1 mark)
iii) This regression uses weight as the dependent or effect variable, and height as the
independent or cause variable. Do you think the causality implied here is correct? (1
mark)
iv) Model SS in the above table refers to explained sum of squares (SSE), Residual SS
refers to residual sum of squares (SSR), while Total SS refers to total sum of squares
(SST). Compute SSE (Model SS) and R-squared for this regression. (1 mark)
v) Provide an interpretation for the R-squared you computed in the previous part. (1
mark)
vi) Suppose you now add another explanatory variable, “Daily Food Intake”, to this
regression. State whether you would expect each of SSE, SSR, SST and R-squared to
change. If you expect any of these components to change, specify whether you would
expect them to increase or decrease. Briefly explain your answers. (2 marks)

Question 2 (10 marks)

Under Assumptions SLR.1 through SLR.5, the sampling variance of the OLS estimator 0,
conditional on the sample values {x1, …, xn} is given as follows:-
Derive the formula above. Show all steps for full credit.
The following questions are from Wooldridge (2005):
Chapter 2 (The Simple Regression Model)
 Problems – 4, 5, 6, 7, 8 9, 10, 11, 12

Chapter 3 (Multiple Regression Analysis: Estimation)

 Problems – 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12

For Exam 2
Chapter 4 (Multiple Regression Analysis: Inference)
 Problems – 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11

Chapter 5 (Multiple Regression Analysis: OLS Asymptotics)

 Problem 2

Chapter 6 (Multiple Regression Analysis: Further Issues)

 Problems – 3, 4

Chapter 7 (Multiple Regression Analysis with Qualitative Information)

 Problems – 1, 2, 3, 4, 8

Chapter 8 (Heteroskedasticity)
 Problems – 1, 2, 3, 4, 6

For Exam 3
Chapter 9 (More on Specification and Data Issues)
 Problems – 3, 4
Chapter 13 (Simple Panel Data Methods)
Question 3 (3 marks)

Chapter 14 (Instrumental Variables)

Question 4 (5 marks)
Consider a simple model to estimate the effect of personal computer (PC) ownership on
college grade point average for graduating seniors at a large public university:
GPA = β0 + β1PC + u
where PC is a binary variable indicating PC ownership.
a) Why might PC ownership be correlated with u?
b) Explain why PC is likely to be related to parents’ annual income. Does this mean
parental income is a good IV for PC? Why or why not?
c) Suppose that, four years ago, the university gave grants to buy computers to roughly
one-half of the incoming students, and the students who received grants were
randomly chosen. Carefully explain how you would use this information to construct
an instrumental variable for PC.

Question 5 (4 marks)
Explain the two conditions required for an instrumental variable. Make sure you express
both conditions mathematically as well.
Question 6 (2 marks)
What is the difference between an instrumental variable and a proxy variable? When would
you use one and when would you use the other?
Chapter 15 (Simultaneous Equations Models)
Question 7 (9 marks)
Suppose that annual earnings and marijuana usage are determined jointly by:

log(earnings) = β0 + β1marijuana + β2edu + u1 (1)
marijuana = α0 + α1log(earnings) + α2edu + α3fine + α4prison + u2 (2)

i) Identify the exogenous and endogenous variables in the above system of equations.
(1 mark)
ii) Find expressions for the reduced form equations for each of the endogenous
variables in this system. (3 marks)
iii) Comment on whether either or both of the structural equations are identified. (1
mark)
iv) Is either of the structural equations overidentified? Explain your answer. (1 mark)
v) Explain in detail how you would estimate (1) and (2). (3 marks)

Introduction to Time Series Econometrics

To be added