Agcaoili, Samantha M.

BSE 3-1

1. (I) Income, age, and family background (such as a number of siblings) are just a few
possibilities. It seems that each of these could be correlated with years of education.
(Income and education are probably positively correlated; age and education may be
negatively correlated because women in more recent cohorts have, on average, more
education; and several siblings and education are probably negatively correlated.)

(II) No, if the factors we listed in part (i) are correlated with education. Because we would
like to hold these factors fixed, they are part of the error term. But if u is correlated with

2.

3. (I) To estimate the intercept and slope parameters of the equation, we must remember
the formula for 0 1. 0 = = 1 )( ) n 2 i=1
1. We need the average value of x and y, denoted: , . = =
d to 25.88 = =

For each observation, compute: ( ) ( ) . Sum

our numerator. The denominator is the square of the difference between ( ),

summed up across all observations. The resulting number is

0.10= 1 Now plug this into the expression for 0 and we get: 3.21 = 0+0.10*25.875
Solving for the intercept term we get: .62 The parameter
estimates suggest that there is a positive relationship between ACT score and GPA,

college.

Specifically, a one-point increase in ACT score is predicted to increase GPA in college

= 0.10 , =1 = 0.10 =
0.10 The intercept of 0.62 suggests that even if someone has an ACT=0, that person
has a baseline GPA=0.62. However, there are no individuals in the sample with ACT
close to zero, so this is not very useful in this data. If ACT score increases by 5 points,
= 0.10 , =5 = 0.10 =
predicted to increase by 0.50 points.
 (II)
Student GPA ACT (fitted (residual)
value)
1 2.8 21 2.72 0.08
2 3.4 24 3.02 0.38
3 3.0 26 3.22 -0.22
4 3.5 27 3.32 0.18
5 3.6 29 3.52 0.08
6 3.0 25 3.12 -0.12
7 2.7 25 3.12 -0.42
8 3.7 30 3.62 0.08

to sum up the residuals, we will get 0.04; which is close to zero.

(III) If ACT=20, the GPA is predicted to be; = 0+ 1 = 0.62 +0.10*20=2.62

(IV) The portion of the variation in GPA that is explained by ACT scores is given by the
R2 of the regression. We can calculate it in a number of ways using the information on
the SST, SSE, and SSR. One option is to compute: R 2 =SSE/SST, where
=1 ) 2 =1 ) 2 For SSE, take the difference between and
=3.21 for each observation and then square it. Sum this up overall observations.

difference between and =3.21 for each observation, and then square it. Sum

scores explain about 55% of the variation in college GPA.

4. (I) If cigs = 0, the predicted birth weight is 119.77 ounces. When cigs = 20, bwght =
109.49. This is about an 8.6% drop.

(II) Not necessarily. Many other factors can affect birth weight, particularly the overall
health of the mother and quality of prenatal care. These could be correlated with
cigarette smoking during birth. Also, something such as caffeine consumption can affect
birth weight, and might also be correlated with cigarette smoking.

(III) If we want a predicted bwght of 125, then cigs = (125 119.77)/( 10.18, or
about 10 cigarettes. This is nonsense, of course, and it shows what happens when we
are trying to predict something as complicated as the birth weight with only a single
explanatory variable. The largest predicted birth weight is necessarily 119.77. Yet almost
700 of the births in the sample had a birth weight higher than 119.77. 1,176 out of 1,388
women did not smoke while pregnant, or about 84.7%.
5. (I) The intercept implies that when inc = 0, cons are predicted to be negative $124.84.
This, of course, cannot be true and reflects the fact that this consumption function might
 be a poor predictor of consumption at very low-income levels. on an annual basis,
$124.84 is not so far from zero.

(II) Connecting 30,000 into the equation: cons = 124.84 + .853(30,000) = 25,465.16
dollars.

(III) MPC and the APC are shown in the following graph. Even though the intercept is
negative, the smallest APC in the sample is positive. The graph starts at an annual
income level of $1,000 (in 1970 dollars).

MPC
APC .9
MPC

.853

APC

.728

.7

1000 10,000 20,000 30,000

INC

6. (I) Yes, if living closer to an incinerator depresses housing prices; then being farther
away increases housing prices.

(II) If the city chose to be located in the incinerator in an area away from expensive
neighborhoods, then log(dist) is positively correlated with housing quality. This would
violate SLR.3, and OLS estimation is biased.

(III) The size of the house, the number of bathrooms, the size of the lot, the age of the
home, and the quality of the neighborhood (including school quality), are just a handful
of factors. As mentioned in part (ii), these could certainly be correlated with dist [and
log(dist)].