September 24, 2017

ECON 301: ECONOMETRICS I

Assignment 1 Answer Key
Part I: End-of-Chapter 1 Questions
2. (i) Here is one way to pose the question: If two firms, say A and B, are identical in all respects
except that firm A supplies job training one hour per worker more than firm B, by how much
would firm A’s output differ from firm B’s?

(ii) Firms are likely to choose job training depending on the characteristics of workers. Some
observed characteristics are years of schooling, years in the workforce, and experience in a
particular job. Firms might even discriminate based on age, gender, or race. Perhaps firms
choose to offer training to more or less able workers, where “ability” might be difficult to
quantify but where a manager has some idea about the relative abilities of different employees.
Moreover, different kinds of workers might be attracted to firms that offer more job training on
average, and this might not be evident to employers.

(iii) The amount of capital and technology available to workers would also affect output. So, two
firms with exactly the same kinds of employees would generally have different outputs if they
use different amounts of capital or technology. The quality of managers would also have an
effect.

(iv) No, unless the amount of training is randomly assigned. The many factors listed in parts (ii)
and (iii) can contribute to finding a positive correlation between output and training even if job
training does not improve worker productivity.

C1. (i)
. use http://fmwww.bc.edu/ec-p/data/wooldridge/wage1.dta

. sum educ

Variable | Obs Mean Std. Dev. Min Max

-------------+---------------------------------------------------------
educ | 526 12.56274 2.769022 0 18

(ii)
. sum wage

Variable | Obs Mean Std. Dev. Min Max

-------------+---------------------------------------------------------
wage | 526 5.896103 3.693086 .53 24.98

The average of wage is about $5.90, which seems low today.

(iii) I obtain the CPI information from Bureau of Labor Statistics (bls.gov). Specifically, I use
the annual averages from the series CUUR0000SA0. The CPI was 56.9 in 1976 and 218.1 in
2010 for all urban consumers.
(iv) To convert 1976 dollars into 2010 dollars, we use the ratio of the CPIs, which is
218.1/56.9=3.83. Therefore, the average hourly wage in 2010 dollars is roughly 5.90*3.83=$22.6,
which is a reasonable figure.

(v)
. tab female

female | Freq. Percent Cum.

------------+-----------------------------------
0 | 274 52.09 52.09
1 | 252 47.91 100.00
------------+-----------------------------------
Total | 526 100.00

The sample contains 252 women and 274 men.

Part II: End-of-Chapter 2 Questions

1. (i) Income, age, and family background (such as 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 number of siblings
and education are probably negatively correlated.)

(ii) Not if the factors we listed in part (i) are correlated with educ. Because we would like to hold
these factors fixed, they are part of the error term. But if u is correlated with educ then E(u|
educ)≠0, and so SLR.4 fails.

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 locate the incinerator in an area away from more expensive
neighborhoods, then log(dist) is positively correlated with housing quality. This would violate
SLR.4, and OLS estimation is biased.

(iii) Size of the house, number of bathrooms, size of the lot, age of the home, and 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)].
~
8. (i) The first job is to recover the form of β 1 . Remember the condition implied from the zero
conditional mean assumption we used to derive the OLS slope, E ( x i u i )=0 with a sample
n
1 ~
counterpart of ∑ x i u^ i=0. Next, consider the regression that needs to be run to get β 1 , i.e.
n i=1
n
~ ~ 1 ~
y i= β 1 xi + u^ i . Plugging u^ i= y i− β 1 x i into the summation, we get ∑ x i ( y i− β 1 x i ) =0, or
n i=1
n n n n
1 ~1 ~
∑ x y = β
n i=1 i i 1 n i=1 i
∑ x 2
. It then follows that β 1 ∑ i i ∑ xi .
= x y / 2

i=1 i=1
 ( )
n n n n
~
Plugging in y i=β 0 + β 1 x i +ui , we get β 1= β 0 ∑ x i + β 1 ∑ x i + ∑ x i u / ∑ x i , or
2 2

i=1 i=1 i=1 i=1

n n n n
~
β 1=β 0 ∑ x i / ∑ x 2i + β 1+ ∑ x i ui / ∑ x 2i . Then, since we treat x’s as nonrandom,
i=1 i=1 i=1 i=1
n n n
β0 ∑ xi ∑ x i E ( ui ) ∑ xi
~
E ( β 1 )= n
i=1
+ β 1+ i=1
n
=β 0 i=1
n
+ β 1.
∑x 2
i ∑x 2
i ∑x 2
i
i=1 i=1 i=1
n
β0∑ xi n
, which is equal to 0 if β 0=0∨∑ x i=0 .
i=1
We showed that the bias introduced is equal to n

∑ x 2i i=1

i=1
Think intuitively why having a sample mean of x equal to 0 does not introduce a bias in the
regression without the intercept!
n n n n
~
(ii) Since β 1=β 0 ∑ x i / ∑ x i + β 1+ ∑ x i ui / ∑ x i ,
2 2

i=1 i=1 i=1 i=1

( )(
n

∑ x i ui

) ( )
2 n 2 n
~ 1 1 σ2
var ( β 1) =var i=1
n
= n ∑ x2i var (ui)= n
σ 2 ∑ x 2i = n .
∑x ∑x ∑x ∑x
2 2 i=1 2 i=1 2
i i i i
i=1 i=1 i=1 i=1

2 2 2
~ σ σ σ
var ( β 1) = n < n
= =Var ( ^
β 1)
(iii) Using the hint, SST x .
∑ x 2i ∑ ( x i−x )2
i=1 i=1

n n
~
(iv) For a given sample size, the bias in β 1 increases as ∑ x i increases (holding∑ x i fixed). On
2

i=1 i=1
n
the other hand, as ∑ x i increases, sample mean of x increases. This increases the variance of ^ β1
i=1
~ ~
with respect to β 1 . The bias in β 1 is also small when β 0 is small. Therefore, what is preferable
n n
depends on β 0, ∑ x i (to n indirectly) and ∑ x i .
2

i=1 i=1

C3. (i)
. use http://fmwww.bc.edu/ec-p/data/wooldridge/sleep75.dta

. reg sleep totwrk

Source | SS df MS Number of obs = 706

-------------+---------------------------------- F(1, 704) = 81.09
Model | 14381717.2 1 14381717.2 Prob > F = 0.0000
 Residual | 124858119 704 177355.282 R-squared = 0.1033
-------------+---------------------------------- Adj R-squared = 0.1020
Total | 139239836 705 197503.313 Root MSE = 421.14

------------------------------------------------------------------------------
sleep | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
totwrk | -.1507458 .0167403 -9.00 0.000 -.1836126 -.117879
_cons | 3586.377 38.91243 92.17 0.000 3509.979 3662.775

The intercept implies that the estimated amount of sleep per week for someone who does not
work is 3,586.4 minutes, or about 59.77 hours. This comes to about 8.5 hours per night.

(ii) If someone works two more hours per week then Δtotwrk = 120 (because totwrk is
measured in minutes), and so Δsleep = –.151(120) = –18.12 minutes. This is only a few minutes
a night. If someone were to work one more hour on each of five working days, Δsleep =
–.151(300) = –45.3 minutes, or about five minutes a night.

C6. (i) The marginal return to spending should be decreasing, so a diminishing effect is more
appropriate.

(ii) In a level-log model, the slope can be interpreted as follows: a 1 percent increase in
expenditure increases mat score by β1/100 percentage points on average since math scores are
measured in percentage points. Then, a 10 percent increase in expenditure increases math10
score by β1/10 percentage points.

(iii)
. reg math10 lexpend

Source | SS df MS Number of obs = 408

-------------+---------------------------------- F(1, 406) = 12.41
Model | 1329.4235 1 1329.4235 Prob > F = 0.0005
Residual | 43487.757 406 107.112702 R-squared = 0.0297
-------------+---------------------------------- Adj R-squared = 0.0273
Total | 44817.1805 407 110.115923 Root MSE = 10.35

------------------------------------------------------------------------------
math10 | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
lexpend | 11.16439 3.169011 3.52 0.000 4.934669 17.3941
_cons | -69.34103 26.53013 -2.61 0.009 -121.4946 -17.18746
------------------------------------------------------------------------------

(iv) If spending increases by 10 percent, math10 pass rate increases by 1.1 percent on average.

(v)
. sum lexpend

Variable | Obs Mean Std. Dev. Min Max

-------------+---------------------------------------------------------
lexpend | 408 8.370177 .1618824 8.111328 8.911799

At the maximum value of lexpend, the fitted math10 value is given by 30.15.
Part III: Other Questions:
O1. Observe that
Cov ( ^
β0, ^
β 1 )=Cov ( Y − β^1 X , ^
β1 ) =Cov ( Y , ^
β 1 )−Cov ( ^
β1 X , ^
β 1 )=Cov ( Y , ^
β1 ) −X Var ( β^1 ). So the
problem boils down to showing Cov ( Y , β^ ) =0, which is more difficult than it seems. Since
1
Y = β0 + β 1 X +U in the population, Y = β0 + β 1 X +U . Therefore,
Cov ( Y , β^ ) =Cov ( β + β X+ U , β^ ) =Cov ( U , ^
1 0 1 1 β ) since β0 and β1 are the population values, which
1

are constants, and we treat X’s as nonrandom. Now, the problem turns into showing
n
β 1=β 1+ ∑ wi ui where w i=( xi −x)/SST x.
Cov ( U , β^1 ) =0. Remember from the lecture notes that ^
i=1
Then,

( ) ( )
n n n
w w w
Cov ( U , β^1 ) =Cov U , β 1 + ∑ w i ui =Cov U , ∑ w i ui = 1 Var ( u 1 )+ 2 Var ( u2 ) +…+ n Var ( un ) =∑ w i Var ( ui ) =σ
i=1 i=1 n n n i=1

.
n

The last step is to observe that

n n ∑ ( x i−x ) n
since ∑ ( xi −x ) =0.
∑ wi=∑ (x i−x )/SST x = i=1SST =0 i=1
i=1 i=1 x

Therefore, Cov ( U , β^1 ) =0, so Cov ( Y , β^1 ). This implies Cov ( ^

β0, ^
β 1 )=− X Var ( ^
β1 ) .

O2.
i. 15 tons.
ii. 6 boats.
iii. Sample variance of Y=52.8 tons2 (use n-1 on the denominator to get the unbiased
estimate). Std Dev of Y=7.27 tons.
iv. Sample variance of X=6.8 boats2.
v. Sample covariance between Y and X=15.4 tons-boats
vi. Sample correlation between Y and X=0.813 (unit free – remember)
^ 15.4
vii. β 1= =2.265 and ^β 0=15−2.265∗6=1.41
6.8
viii. Y^ i=1.41+2.265 X i .
ix. 2.265 tons of fish are caught per boat on average holding everything else constant.
Notice the unit of the slope estimate: tons-boats/boats2=tons/boats
x. 1.412 tons of fish are caught on average when no boats are used. Does that make
sense?