Tutorial 5

Econometrics for ECO

In-class exercises, 6 October 2022

1. Use the data in meap93.Rdata to answer this question.

(a) Estimate the model

math10 = β0 + β1 ln(expend) + β2 lnchprg + u

and report the equation in the usual form, including the sample size and R-squared.
Are the signs of the slope coefficients what you expected?
(b) What do you make of the intercept you estimated in part (a)? In particular, does
it make sense to set the two explanatory variables to zero? [Hint: Recall that
ln(1) = 0.]
(c) Now run the simple regression of math10 on ln(expend), and compare the slope
coefficient with the estimate obtained in part (a). Is the estimated spending effect
now larger or smaller than in part (a)?
(d) Find the correlation between ln(expend) and lnchprg. Does its sign make sense to
you?
(e) Use part (d) to explain your findings in part (c).
2. Use the data in gpa1.RData for this exercise.
(a) Estimate a model explaining college GPA in terms of high school GPA (hsGPA),
ACT score (ACT ), and the average number of lectures missed missed per week
(skipped ) as follows:

colGP A = β0 + β1 hsGP A + β2 ACT + β3 skipped + u

Report the results including the number of observations and the R-squared.
(b) Using the standard normal approximation, find the 95% confidence interval for
βhsGP A .
(c) Can you reject the hypothesis H0 : βhsGP A = 0 against the two-sided alternative at
the 5% level?
(d) Can you reject the hypothesis H0 : βhsGP A = 0.4 against the two-sided alternative
at the 5% level?
3. Use the data ceosal1.Rdata for this exercise. Consider an equation to explain salaries of
CEOs in terms of annual firm sales, return on equity (roe, in %), and return on the firm’s
stock (ros, in units):

ln(salary) = β0 + β1 ln(sales) + β2 roe + β3 ros + u

1
 (a) In terms of the model parameters, state the null hypothesis that, after controlling
for sales and roe, ros has no effect on CEO salary. State the alternative that better
stock market performance increases a CEO’s salary.
(b) Estimate the model in part (a) and report the results in the usual form. By what
percentage is salary predicted to increase if ros increases by 50 points? Does ros
have a practically large effect on salary?
(c) Test the null hypothesis that ros has no effect on salary against the alternative that
ros has a positive effect. Carry out the test at the 10% significance level.
(d) Test the null hypothesis that none of the explanatory variables has effect on salary
at 5% level.
(e) Test the null hypothesis that the variables ros and roe are jointly insignificant after
controlling for ln(sales). Carry out the test at 5% level.
(f) Would you include ros in a final model explaining CEO compensation in terms of
firm performance? Explain.
EXTRA:
4. Use the data in hprice1.Rdata to estimate the model

price = β0 + β1 sqrf t + β2 bdrms + u

where price is the house price measured in thousands of dollars.

(a) Write out the results in equation form.
(b) What is the estimated increase in price for a house with one more bedroom, holding
square footage constant?
(c) What is the estimated increase in price for a house with an additional bedroom that
is 140 square feet in size? Compare this to your answer in part (b).
(d) What percentage of the variation in price is explained by square footage and number
of bedrooms?
(e) The first house in the sample has sqrf t = 2, 438 and bdrms = 4. Find the predicted
selling price for this house from the OLS regression line.
(f) The actual selling price of the first house in the sample was USD300,000 (so price =
300). Find the residual for this house. Does it suggest that the buyer underpaid or
overpaid for the house?