Homework 2 for Econometrics

(due April 26, 2023)

The full credit for this homework is 20.

Spring 2023
1. Consider the estimated equation from Example 4.3, which can be used to study the e¤ects of skipping
class on college GPA:

\
colGPA = 1:39 + 0:412hsGPA + 0:015ACT 0:083skipped

(0:33) (0.094) (0.011) (0:026)

n = 141; R2 = 0:234

(i) Using the standard normal approximation, …nd the 95% con…dence interval for hsGPA.
(ii) Can you reject the hypothesis H0: hsGP A = 0:4 against the two-sided alternative at the 5% level?

(iii) Can you reject the hypothesis H0: hsGP A = 1 against the two-sided alternative at the 5% level?

2. (i) In the simple regression model

price = 0 + 1 assess + u;

the assessment is rational if 1 = 1 and 0 = 0. The estimated equation is

[ =
price 14:47 + 0:976assess

(16:27) (0.049)

n = 88; SSR = 165644:51; R2 = 0:820

First, test the hypothesis that H0: 0 = 0 against the two-sided alternative. Then, test H0: 1 = 1
against the two-sided alternative. What do you conclude?

(ii) To test the joint hypothesis that 1 = 1 and 0 = 0, we need the SSR in the restricted model. This
Pn
amounts to computing i=1 (pricei assessi )2 , where n = 88, since the residuals in the restricted model
are just pricei assessi . (No estimation is needed for the restricted model because both parameters are
speci…ed under H0.) This turns out to yield SSR = 209448:99. Carry out the F test for the joint hypothesis.

(iii) Now, test H0: 2 = 3 = 4 = 0 in the model

price = 0 + 1 assess + 2 lotsize + 3 sqrf t + 4 bdrms + u.

 The R-squared from estimating this model using the same 88 houses is 0.829.
(iv) If the variance of price changes with assess, lotsize, sqrft, or bdrms, what can you say about the F

test from part (iii)?

3. We estimated the equation

[ =
sleep 3638:25 0:148totwork 11:13educ + 2:20age

(112:28) (0.017) (5.88) (1.45)

n = 706; R2 = 0:113

where we now report standard errors along with the estimates.

(i) Is either educ or age individually signi…cant at the 5% level against a two-sided alternative? Show
your work.

(ii) Dropping educ and age from the equation gives

[ =
sleep 3586:38 0:151totwork

(38:91) (0.017)

n = 706; R2 = 0:103

Are educ and age jointly signi…cant in the original equation at the 5% level? Justify your answer.

(iii) Does including educ and age in the model greatly a¤ect the estimated tradeo¤ between sleeping and
working?
(iv) Suppose that the sleep equation contains heteroskedasticity. What does this mean about the tests
computed in parts (i) and (ii)?

4. The data set 401KSUBS.DTA contains information on net …nancial wealth (nettfa), age of the survey
respondent (age), annual family income (inc), family size (fsize), and participation in certain pension plans
for people in the United States. The wealth and income variables are both recorded in thousands of dollars.

For this question, use only the data for single-person households (so fsize=1).
(i) How many single-person households are there in the data set?
(ii) Use OLS to estimate the model

nettf a = 0 + 1 inc + 2 age + u,

and report the results using the usual format. Be sure to use only the single-person households in the
sample. Interpret the slope coe¢ cients. Are there any surprises in the slope estimates?

2
 (iii) Does the intercept from the regression in part (ii) have an interesting meaning? Explain.
(iv) Find the p-value for the test H0: 2 = 1 against H0: 2 < 1. Do you reject H0 at the 1% signi…cance

level?
(v) If you do a simple regression of nettfa on inc, is the estimated coe¢ cient on inc much di¤erent from
the estimate in part (ii)? Why or why not?

5. Using the data in RDCHEM.RAW, the following equation was obtained by OLS:

\
rdintens = 2:613 + 0:00030sales 0:0000000070sales2

(0:429) (0:00014) (0:0000000037)

n = 32; R2 = 0:1484

(i) At what point does the marginal e¤ect of sales on rdintens become negative?
(ii) Would you keep the quadratic term in the model? Explain.
(iii) De…ne salesbil as sales measured in billions of dollars: salesbil=sales/1,000.

Rewrite the estimated equation with salesbil and salesbil2 as the independent variables. Be sure to report
standard errors and the R-squared.
[Hint: Note that salesbil2 =sales2 =(1000)2 ]
(iv) For the purpose of reporting the results, which equation do you prefer?