Final - Econ3005 - 2022spring - Combined 2

HONG KONG BAPTIST UNIVERSITY Page: 1
SEMESTER 1 EXAMINATION, 2021-2022
Course Code: Econ3005 Section Number: 00001 Time Allowed: 2.5 Hour(s)
Course Title: Applied Econometrics Total No. of Pages: 10
Instruction: You are NOT allowed to use class notes, textbooks or any reference related with
the course materials, except for a 2 sided hand-written A4 cheat sheet. The use of calculator is
OK. Please write legibly. Read the questions carefully and provide concise but justified
answers. The paper contains 3 parts and the full mark of the examination is 100. The tables for
standard normal distribution and F distribution are provided. You may use them when it is
needed. You have 2.5 hours. SHOW ALL YOUR WORK.
The tables for standard normal distribution and F distribution are provided. You may use them
when it is needed.
Part 1 Multiple Choice (30 points, 3 each)

Please choose the answer that you think is most appropriate.
1.1 In the simple linear regression model Yi = b 0 + b1 X i + ui ,
a. the intercept is typically small and unimportant.
b. 0
b + b1 X i represents the population regression function.
c. the absolute value of the slope is typically between 0 and 1.
d. b 0 + b1 X i represents the sample regression function.
1.2 To decide whether or not the slope coefficient is large or small,

a. you should analyze the economic importance of a given increase in X.
b. the slope coefficient must be larger than one.
c. the slope coefficient must be statistically significant.
d. you should change the scale of the X variable if the coefficient appears to be too small.
1.3 The construction of the t-statistic for a one- and a two-sided hypothesis
a. depends on the critical value from the appropriate distribution
b. is the same.
c. is different since the critical value must be 1.645 for the one-sided hypothesis, but 1.96 for
the two-sided hypothesis (using a 5% probability for the Type I error).
d. uses ±1.96 for the two-sided test, but only +1.96 for the one-sided test.
1.4 If you had a two regressor regression model, then omitting one variable which is relevant
a. will have no effect on the coefficient of the included variable if the correlation between the
excluded and the included variable is negative.
b. will always bias the coefficient of the included variable upwards.
c. can result in a negative value for the coefficient of the included variable, even though the
coefficient will have a significant positive effect on Y if the omitted variable were
included.
d. makes the sum of the product between the included variable and the residuals different
from 0.
1.5 The interpretation of the slope coefficient in the model ln(Yi ) = b 0 + b1 ln( X i ) + ui is as
follows:
a. a.1% change in X is associated with a b1 % change in Y.
b. change in X by one unit is associated with a b1 change in Y.
c. change in X by one unit is associated with a 100 b1 % change in Y.
d. 1% change in X is associated with a change in Y of 0.01 b1 .
1.6 In the case of regression with interactions, the coefficient of a binary variable should be
interpreted as follows:
a. there are really problems in interpreting these, since the ln(0) is not defined.
b. for the case of interacted regressors, the binary variable coefficient represents the various
intercepts for the case when the binary variable equals one.
c. first set all explanatory variables to one, with the exception of the binary variables. Then
allow for each of the binary variables to take on the value of one sequentially. The
resulting predicted value indicates the effect of the binary variable.
d. first compute the expected values of Y for each possible case described by the set of binary
variables. Next compare these expected values. Each coefficient can then be expressed
either as an expected value or as the difference between two or more expected values.
1.7 A nonlinear function

a. makes little sense, because variables in the real world are related linearly.
b. can be adequately described by a straight line between the dependent variable and one of
the explanatory variables.
c. is a concept that only applies to the case of a single or two explanatory variables since you
cannot draw a line in four dimensions.
b. is a function with a slope that is not constant.
DY
1.8 In the model Yi = b 0 + b1 X 1 + b 2 X 2 + b 3 ( X 1 ´ X 2 ) + ui , the expected effect D X 1 is
a. b1 + b 3 X 2 .
b. b1 .
b + b3 .
c. 1
b + b3 X 1 .
d. 1
1.9 The following problems could be analyzed using probit and logit estimation with the
exception of whether or not
a. a college student decides to study abroad for one semester.
b. being a female has an effect on earnings.
c. a college student will attend a certain college after being accepted.
d. applicants will default on a loan.
1.10 For the measure of fit in your regression model with a binary dependent variable, you can
meaningfully use the
a. regression R2 .
b. size of the regression coefficients.
c. pseudo R2 .
d. standard error of the regression.
Part 2 Short Questions (30 points in total)

Note: for each sub-question, the answer should not be longer than 7 lines.
(17 points) 2.1 The following model allows the return to education to depend upon the total
amount of both parents’ education, called pareduc:
log(wage) = + + ∙ + + +
All independent variables are measured as year, and pareduc is the sum of mom’s and father’s
education year.
a. The return to another year of education in this model is
∆ log(wage)
= +
∆educ
What sign do you expect for ? Why? (3 points)
b. By the data, the estimated equation is
log ( ) = 5.65 + 0.047 + 0.00078 ∙ +
(0.13) (0.010) (0.00021)
0.019 + 0.010
(0.004) (0.003)
= 720, = .169
Interpret the coefficient on the interaction term. It might help to choose two specific values
for pareduc --- for example, pareduc = 32 if both parents have a college education, or
pareduc = 24 if both parents have a high school education – and to compare the estimated
return to educ. (6 points)
c. When pareduc is added as a separate variable to the equation, we get
log( ) = 4.94 + 0.097 + .033 − .0016 ∙ +
(. 38) (. 027) (. 017) (0.0012)
0.020 + 0.010
(0.004) (0.003)
= 722, = .174
Does the estimated return to education now depend positively on parent education? Test the
null hypothesis that the return to education does not depend on parent education. (5 points)
d. Which regression model do you prefer? (b) or (c), why? (3 points)
(13 points) 2.2 Four hundred driver’s license applicants were randomly selected and asked
whether they passed their driving test ( = 1 ) or failed their test ( = 0 ); data were
also collected on their gender ( = 1 if male and =0 if female) and their years of driving
experience ( in years). By this data, a probit model is estimated and the result is as
the following.
Pr( = 1) = Φ(0.806 + 0.041Experience − 0.174Male − 0.015Male × Experience)
(0.200) (0.156) (0.259) (0.019)
The cumulative standard normal distribution table is appended.
a. Alpha is a man with 12 years of driving experience. What is the probability that he will pass
the test? (4 points)
b. Belta is a woman with 5 years of driving experience. What is the probability that she will pass
the test? (4 points)
c. Does the effect of experience on test performance depend on gender? Explain. (5 points)
Part 3 Long Questions (40 points in total)

Note: for each sub-question, the answer should not be longer than 10 lines.
(17 points) 3.1 You have the data for houses that sold during 1981 in North Andover,
Massachusetts: 1981 was the year construction began on a local garbage incinerator. We are
interested in the question whether the construction of the garbage incinerator affects the housing
price. Note: for this question, significance level is accepted only if it is equal to or higher than
5%.
a. To study the effects of the incinerator location on housing price, we first run the simple
regression model:
lnPrice = + +
where lnPrice is the logarithm of housing price (log(dollars)) and lndist is the logarithm of the
distance from the house to the incinerator (log(feet)). We obtain the following output from R.
Please interpret the results according to the output. (3 points)
b.To the simple regression model in part (a), we add the variable intst, larea, lland, rooms, baths,
and age, where intst is the distance from the home to the interstate, larea is square footage of
the house, land is the lot size in square feet, rooms is total number of rooms, baths is number
of bathrooms, and age is age of the house in years. The regression outcome is given by the
following. Now, what do you conclude about the effect of the incinerator? Explain why (a)
and (b) give different results. (6 points)
c. Based on part (b), we replace intst with hiintst and add one more term lndist_hiintst, where
hiintst is the dummy variable indicating the observations with intst higher than the sample
mean, lndist_hiintst is the interaction term between lndist and hiintst. Then we obtain the
following results. Compared with part (b), what happened? How do you interpret the
relationship between the distance to the incinerator and the housing price? (Please only
answer the related part with the research question). (6 points)
d. Why does the R scripts “robust=TRUE” is used to get the analysis done? (2 points)
(23 points) 3.2 The data used in the question is from a job training experiment for a group of
men. Men could enter the program starting in January 1976 through about mid-1977. The
program ended in December 1977. A study tried to test whether participation in the job training
program had an effect on unemployment probabilities in 1978. (Note: for each sub-question ((a),
(b), (c), (d)), the answer should not be longer than 8 lines.) Here is the description of the related
variables:
unem78 : =1, if unemployed in 1978; 0, otherwise.
train : the job training indicator. =1, trained; 0, otherwise.
age : age in 1977
educ : years of education
white : =1, the individual is white; 0, otherwise.
married ; =1, if married; 0, otherwise.
a. Dr. Qin first runs a linear probability model and obtain the following results:
Does the training program seem to help? How much? (4 points)
b. Dr. Qin studied the binary dependent variable regressions and then decide to run the two
models that she has studied. She received the results as the following.
Dr. Qin was confused about the different coefficient estimates for the training program. Is the
impact estimated from logit model higher than the one estimated from the probit model
because 0.50 > 0.30? Explain. (4 points)
c. Dr. Qin further studied some knowledge about the probit and logit model and she checks
the following.
What can you conclude about the impact of the job training program from the results? Please
interpret. Which estimation gives higher estimate for the impact? (6 points)
d. Dr. Qin is further interested in the probability prediction for certain type of persons. She
did the following
What does prob1 represent for? What does prob0 represent for? (4 points)
e. Dr. Qin is wondering whether the unemployment status in 1974 and 1975 affect the effect of
the training program or not. To answer this question, please suggest a regression model
and/or hypothesis test for Dr. Qin. (5 points)
------End of the exam-------

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HONG KONG BAPTIST UNIVERSITY Page: 1

SEMESTER 1 EXAMINATION, 2021-2022

Part 1 Multiple Choice (30 points, 3 each)

1.2 To decide whether or not the slope coefficient is large or small,

1.7 A nonlinear function

Part 2 Short Questions (30 points in total)

Part 3 Long Questions (40 points in total)

Does the training program seem to help? How much? (4 points)

------End of the exam-------

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