Chapter 3 Econometrics Practice MC

lOMoARcPSD|17567607
Chapter 3 Econometrics Practice MC
Introductory Econometrics (Wilfrid Laurier University)
Studocu is not sponsored or endorsed by any college or university

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)
lOMoARcPSD|17567607
Introduction to Econometrics, 4e (Stock/Watson)

Chapter 3 Review of Statistics
3.1 Multiple Choice Questions
1) An estimator is:
A) an estimate.
B) a formula that gives an efficient guess of the true population value.
C) a random variable.
D) a nonrandom number.
Answer: C
2) An estimate is:
A) efficient if it has the smallest variance possible.
B) a nonrandom number.
C) unbiased if its expected value equals the population value.
D) another word for estimator.
Answer: B
3) An estimator Y of the population value is unbiased if:

A) Y = .
B) has the smallest variance of all estimators.
C) .
D) E( ) = .
Answer: D
4) An estimator Y of the population value is consistent if:

A) Y .
B) its mean square error is the smallest possible.
C) Y is normally distributed.
D) 0.
Answer: A
5) An estimator Y of the population value is more efficient when compared to another

estimator Y, if:
A) E( ) > E( Y).
B) it has a smaller variance.
C) its c.d.f. is flatter than that of the other estimator.
D) both estimators are unbiased, and var( ) < var( ).
Answer: D
6) With i.i.d. sampling each of the following is true EXCEPT:

A) E( ) = .

lOMoARcPSD|17567607
B) var( ) = /n.
C) E( ) < E(Y).
D) is a random variable.
Answer: C
7) The standard error of , SE( ) = is given by the following formula:
A) )2.
B) .
C) .
D) .
Answer: D
8) The critical value of a two-sided t-test computed from a large sample:

A) is 1.64 if the significance level of the test is 5%.
B) cannot be calculated unless you know the degrees of freedom.
C) is 1.96 if the significance level of the test is 5%.
D) is the same as the p-value.
Answer: C
9) A type I error is:

A) always the same as (1-type II) error.
B) the error you make when rejecting the null hypothesis when it is true.
C) the error you make when rejecting the alternative hypothesis when it is true.
D) always 5%.
Answer: B
10) A type II error:

A) is typically smaller than the type I error.
B) is the error you make when choosing type II or type I.
C) is the error you make when not rejecting the null hypothesis when it is false.
D) cannot be calculated when the alternative hypothesis contains an "=".
Answer: C

lOMoARcPSD|17567607
11) The size of the test:

A) is the probability of committing a type I error.
B) is the same as the sample size.
C) is always equal to (1-the power of test).
D) can be greater than 1 in extreme examples.
Answer: A
12) The power of the test is:

A) dependent on whether you calculate a t or a t2 statistic.
B) one minus the probability of committing a type I error.
C) a subjective view taken by the econometrician dependent on the situation.
D) one minus the probability of committing a type II error.
Answer: D
13) When you are testing a hypothesis against a two-sided alternative, then the alternative is
written as:
A) E(Y) > .
B) E(Y) = .
C) ≠ .
D) E(Y) ≠ .
Answer: D
14) A scatterplot:
A) shows how Y and X are related when their relationship is scattered all over the place.
B) relates the covariance of X and Y to the correlation coefficient.
C) is a plot of n observations on Xi and Yi, where each observation is represented by the point
(Xi, Yi).
D) shows n observations of Y over time.
Answer: C
15) The following types of statistical inference are used throughout econometrics, with the
exception of:
A) confidence intervals.
B) hypothesis testing.
C) calibration.
D) estimation.
Answer: C

lOMoARcPSD|17567607
16) Among all unbiased estimators that are weighted averages of Y1,..., Yn , is:
A) the only consistent estimator of .
B) the most efficient estimator of .
C) a number which, by definition, cannot have a variance.
D) the most unbiased estimator of .
Answer: B
17) To derive the least squares estimator , you find the estimator m which minimizes:
A) .
B)
C) .
D) .
Answer: A
18) If the null hypothesis states H0 : E(Y) = , then a two-sided alternative hypothesis is:
A) H1 : E(Y) ≠ .
B) H1 : E(Y) ≈ .
C) H1 : < .
D) H1 : E(Y) > .
Answer: A
19) The p-value is defined as follows:

A) p = 0.05.
B) PrH0 [ – > act– ].
C) Pr(z > 1.96).
D) PrH0 [ – < act– ]..
Answer: B
20) A large p-value implies:

A) rejection of the null hypothesis.
B) a large t-statistic.
C) a large act.
D) that the observed value act is consistent with the null hypothesis.
Answer: D
21) The formula for the sample variance is:

lOMoARcPSD|17567607
A) = – ).
B) = – )2.
C) = – )2.
D) = – )2.
Answer: B
22) Degrees of freedom:

A) in the context of the sample variance formula means that estimating the mean uses up some of
the information in the data.
B) is something that certain undergraduate majors at your university/college other than
economics seem to have an ∞ amount of.
C) are (n-2) when replacing the population mean by the sample mean.
D) ensure that = .
Answer: A
23) The t-statistic is defined as follows:
A) t = .
B) t = .
C) t = .
D) 1.96.
Answer: A
24) The power of the test:

A) is the probability that the test actually incorrectly rejects the null hypothesis when the null is
true.
B) depends on whether you use or 2 for the t-statistic.
C) is one minus the size of the test.
D) is the probability that the test correctly rejects the null when the alternative is true.
Answer: D
25) The sample covariance can be calculated in any of the following ways, with the exception of:

lOMoARcPSD|17567607
A) – ).
B) .
C) – ).
D) rXYSYSY, where rXY is the correlation coefficient.

Answer: C
26) When the sample size n is large, the 90% confidence interval for is:
A) ± 1.96SE( ).
B) ± 1.64SE( ).
C) ± 1.64 .
D) ± 1.96.
Answer: B
27) The standard error for the difference in means if two random variables M and W , when the
two population variances are different, is:
A) .
B) + .
C) .
D) .
Answer: D
28) The t-statistic has the following distribution:

A) standard normal distribution for n < 15
B) Student t distribution with n–1 degrees of freedom regardless of the distribution of the Y.
C) Student t distribution with n–1 degrees of freedom if the Y is normally distributed.
D) a standard normal distribution if the sample standard deviation goes to zero.
Answer: C
29) The following statement about the sample correlation coefficient is TRUE.
A) –1 ≤ ≤ 1.

lOMoARcPSD|17567607
B) corr(Xi, Yi).
C) < 1.
D) = .
Answer: A
30) The correlation coefficient:

A) lies between zero and one.
B) is a measure of linear association.
C) is close to one if X causes Y.
D) takes on a high value if you have a strong nonlinear relationship.
Answer: B
31) When testing for differences of means, the t-statistic t = , where SE( - )=
has:
A) a student t distribution if the population distribution of Y is not normal

B) a student t distribution if the population distribution of Y is normal
C) a normal distribution even in small samples
D) cannot be computed unless =
Answer: B
32) When testing for differences of means, you can base statistical inference on the:
A) Student t distribution in general
B) normal distribution regardless of sample size
C) Student t distribution if the underlying population distribution of Y is normal, the two groups
have the same variances, and you use the pooled standard error formula
D) Chi-squared distribution with ( + - 2) degrees of freedom
Answer: C

lOMoARcPSD|17567607
33) Assume that you have 125 observations on the height (H) and weight (W) of your peers in
college. Let
= 68, = 3.5, = 29. The sample correlation coefficient is:
A) 1.22
B) 0.50
C) 0.67
D) Cannot be computed since males and females have not been separated out.
Answer: C
34) You have collected data on the average weekly amount of studying time (T) and grades (G)
from the peers at your college. Changing the measurement from minutes into hours has the
following effect on the correlation coefficient:
A) decreases the by dividing the original correlation coefficient by 60
B) results in a higher
C) cannot be computed since some students study less than an hour per week
D) does not change the
Answer: D
35) A low correlation coefficient implies that:

A) the line always has a flat slope
B) in the scatterplot, the points fall quite far away from the line
C) the two variables are unrelated
D) you should use a tighter scale of the vertical and horizontal axis to bring the observations
closer to the line
Answer: B
36) The size of a test:

A) should be 5% because historically statisticians have used 5% as a significance level
B) requires judgment and depends on the application
C) should always be lower than 5%
D) is always equal to (1-power of a test)
Answer: B
37) The fraction of incorrect rejections among all rejections is called:

A) false positive rate
B) the power of the test
C) false negative rate
D) the 5% significance level
Answer: A
38) The p-value for a one-sided alternative is:

A) half the probability for a two-sided alternative
B) always 5%
C) twice the probability for a two-sided alternative
D) always the same as the power of the test
Answer: C
3.2 Essays and Longer Questions

lOMoARcPSD|17567607
1) Think of at least nine examples, three of each, that display a positive, negative, or no
correlation between two economic variables. In each of the positive and negative examples,
indicate whether or not you expect the correlation to be strong or weak.
Answer: Answers will vary by student. Students frequently bring up the following correlations.
Positive correlations: earnings and education (hopefully strong), consumption and personal
disposable income (strong), per capita income and investment-output ratio or saving rate
(strong); negative correlation: Okun's Law (strong), income velocity and interest rates (strong),
the Phillips curve (strong); no correlation: productivity growth and initial level of per capita
income for all countries of the world (beta-convergence regressions), consumption and the (real)
interest rate, employment and real wages.
2) Adult males are taller, on average, than adult females. Visiting two recent American Youth
Soccer Organization (AYSO) under 12 year old (U12) soccer matches on a Saturday, you do not
observe an obvious difference in the height of boys and girls of that age. You suggest to your
little sister that she collect data on height and gender of children in 4th to 6th grade as part of her
science project. The accompanying table shows her findings.
Height of Young Boys and Girls, Grades 4-6, in inches
Boys Girls
57.8 3.9 55 58.4 4.2 57
(a) Let your null hypothesis be that there is no difference in the height of females and males at
this age level. Specify the alternative hypothesis.
(b) Find the difference in height and the standard error of the difference.
(c) Generate a 95% confidence interval for the difference in height.
(d) Calculate the t-statistic for comparing the two means. Is the difference statistically significant
at the 1% level? Which critical value did you use? Why would this number be smaller if you had
assumed a one-sided alternative hypothesis? What is the intuition behind this?
Answer: (a) H0 : - = 0 vs. H1 : - ≠0
(b) - = -0.6, SE( - )= + = 0.77.

(c) -0.6 ± 1.96 × 0.77 = (-2.11, 0.91).
(d) t = -0.78, so < 2.58, which is the critical value at the 1% level. Hence you cannot reject
the null hypothesis. The critical value for the one-sided hypothesis would have been 2.33.
Assuming a one-sided hypothesis implies that you have some information about the problem at
hand, and, as a result, can be more easily convinced than if you had no prior expectation.

lOMoARcPSD|17567607
3) Math SAT scores (Y) are normally distributed with a mean of 500 and a standard deviation of
100. An evening school advertises that it can improve students' scores by roughly a third of a
standard deviation, or 30 points, if they attend a course which runs over several weeks. (A
similar claim is made for attending a verbal SAT course.) The statistician for a consumer
protection agency suspects that the courses are not effective. She views the situation as follows:
H0 : = 500 vs. H1 : = 530.
(a) Sketch the two distributions under the null hypothesis and the alternative hypothesis.
(b) The consumer protection agency wants to evaluate this claim by sending 50 students to attend
classes. One of the students becomes sick during the course and drops out. What is the
distribution of the average score of the remaining 49 students under the null, and under the
alternative hypothesis?
(c) Assume that after graduating from the course, the 49 participants take the SAT test and score
an average of 520. Is this convincing evidence that the school has fallen short of its claim? What
is the p-value for such a score under the null hypothesis?
(d) What would be the critical value under the null hypothesis if the size of your test were 5%?
(e) Given this critical value, what is the power of the test? What options does the statistician have
for increasing the power in this situation?
Answer: (a)
(b) of the 49 participants is normally distributed, with a mean of 500 and a standard deviation
of 14.286 under the null hypothesis. Under the alternative hypothesis, it is normally distributed
with a mean of 530 and a standard deviation of 14.286.
(c) It is possible that the consumer protection agency had chosen a group of 49 students whose
average score would have been 490 without attending the course. The crucial question is how
likely it is that 49 students, chosen randomly from a population with a mean of 500 and a
standard deviation of 100, will score an average of 520. The p-value for this score is 0.081,
meaning that if the agency rejected the null hypothesis based on this evidence, it would make a
mistake, on average, roughly 1 out of 12 times. Hence the average score of 520 would allow
rejection of the null hypothesis that the school has had no effect on the SAT score of students at
the 10% level.
(d) The critical value would be 523.
(e) Pr( < 523 is true) = 0.312. Hence the power of the test is 0.688. She could increase the
power by decreasing the size of the test. Alternatively, she could try to convince the agency to
hire more test subjects, i.e., she could increase the sample size.

lOMoARcPSD|17567607
4) Your packaging company fills various types of flour into bags. Recently there have been
complaints from one chain of stores: a customer returned one opened 5 pound bag which
weighed significantly less than the label indicated. You view the weight of the bag as a random
variable which is normally distributed with a mean of 5 pounds, and, after studying the machine
specifications, a standard deviation of 0.05 pounds.
(a) You take a sample of 20 bags and weigh them. Sketch below what the average pattern of
individual weights might look like. Let the horizontal axis indicate the sampled bag number (1,
2, …, 20). On the vertical axis, mark the expected value of the weight under the null hypothesis,
and two (≈ 1.96) standard deviations above and below the expected value. Draw a line through
the graph for E(Y) + 2 , E(Y), and E(Y) – 2 . How many of the bags in a sample of 20 will
you expect to weigh either less than 4.9 pounds or more than 5.1 pounds?
(b) You sample 25 bags of flour and calculate the average weight. What is the distribution of the
average weight of these 25 bags? Repeating the same exercise 20 times, sketch what the
distribution of the average weights would look like in a graph similar to the one you drew in (b),
where you have adjusted the standard error of accordingly.
(c) For each of the twenty observations in (c) a 95% confidence interval is constructed. Draw
these confidence intervals, using the same graph as in (c). How many of these 20 confidence
intervals would you expect to weigh 5 pounds under the null hypothesis?
Answer:
(a) On average, there should be one bag in every sample of 20 which weighs less than 4.9 pounds
or more than 5.1 pounds.

lOMoARcPSD|17567607
(b) The average weight of 25 bags will be normally distributed, with a mean of 5 pounds and a
standard deviation of 0.01 pounds. (Same graph as in (a), but with the following lower and upper
bounds.)
(c) You would expect 19 of the 20 confidence intervals to contain 5 pounds.

lOMoARcPSD|17567607
5) Assume that two presidential candidates, call them Bush and Gore, receive 50% of the votes in
the population. You can model this situation as a Bernoulli trial, where Y is a random variable
with success probability Pr(Y = 1) = p, and where Y = 1 if a person votes for Bush and Y = 0
otherwise. Furthermore, let be the fraction of successes (1s) in a sample, which is distributed
N(p, ) in reasonably large samples, say for n ≥ 40.
(a) Given your knowledge about the population, find the probability that in a random sample of
40, Bush would receive a share of 40% or less.
(b) How would this situation change with a random sample of 100?
(c) Given your answers in (a) and (b), would you be comfortable to predict what the voting
intentions for the entire population are if you did not know p but had polled 10,000 individuals at
random and calculated ? Explain.
(d) This result seems to hold whether you poll 10,000 people at random in the Netherlands or the
United States, where the former has a population of less than 20 million people, while the United
States is 15 times as populous. Why does the population size not come into play?
Answer:
(a) Pr( < 0.40) = Pr(Z < ) = Pr(Z < -1.26) ≈ 0.104. In roughly every 10th sample of this
size, Bush would receive a vote of less than 40%, although in truth, his share is 50%.
(b) Pr( < 0.40) = Pr(Z < ) = Pr(Z < -2.00) ≈ 0.023. With this sample size, you would
expect this to happen only every 50th sample.

(c) The answers in (a) and (b) suggest that for even moderate increases in the sample size, the
estimator does not vary too much from the population mean. Polling 10,000 individuals, the
probability of finding a of 0.48, for example, would be 0.00003. Unless the election was
extremely close, which the 2000 election was, polls are quite accurate even for sample sizes of
2,500.
(d) The distribution of sample means shrinks very quickly depending on the sample size, not the
population size. Although at first this does not seem intuitive, the standard error of an estimator
is a value which indicates by how much the estimator varies around the population value. For
large sample sizes, the sample mean typically is very close to the population mean.

lOMoARcPSD|17567607
6) You have collected weekly earnings and age data from a sub-sample of 1,744 individuals
using the Current Population Survey in a given year.
(a) Given the overall mean of $434.49 and a standard deviation of $294.67, construct a 99%
confidence interval for average earnings in the entire population. State the meaning of this
interval in words, rather than just in numbers. If you constructed a 90% confidence interval
instead, would it be smaller or larger? What is the intuition?
(b) When dividing your sample into people 45 years and older, and younger than 45, the
information shown in the table is found.
Age Category Average Earnings Standard N

Deviation
Age ≥ 45 $488.87 $328.64 507
Age < 45 $412.20 $276.63 1237
Test whether or not the difference in average earnings is statistically significant. Given your
knowledge of age-earning profiles, does this result make sense?
Answer:
(a) The confidence interval for mean weekly earnings is 434.49 ± 2.58 × = 434.49 ± 18.20
= (416.29, 452.69). Based on the sample at hand, the best guess for the population mean is
$434.49. However, because of random sampling error, this guess is likely to be wrong. Instead,
the interval estimate for the average earnings lies between $416.29 and $452.69. Committing to
such an interval repeatedly implies that the resulting statement is incorrect 1 out of 100 times.
For a 90% confidence interval, the only change in the calculation of the confidence interval is to
replace 2.58 by 1.64. Hence the confidence interval is smaller. A smaller interval implies, given
the same average earnings and the standard deviation, that the statement will be false more often.
The larger the confidence interval, the more likely it is to contain the population value.
(b) Assuming unequal population variances, t = = 4.62, which is statistically
significant at conventional levels whether you use a two-sided or one-sided alternative. Hence
the null hypothesis of equal average earnings in the two groups is rejected. Age-earning profiles
typically take on an inverted U-shape. Maximum earnings occur in the 40s, depending on some
other factors such as years of education, which are not considered here. Hence it is not clear if
the alternative hypothesis should be one-sided or two-sided. In such a situation, it is best to
assume a two-sided alternative hypothesis.

lOMoARcPSD|17567607
7) A manufacturer claims that a certain brand of VCR player has an average life expectancy of 5
years and 6 months with a standard deviation of 1 year and 6 months. Assume that the life
expectancy is normally distributed.
(a) Selecting one VCR player from this brand at random, calculate the probability of its life
expectancy exceeding 7 years.
(b) The Critical Consumer magazine decides to test fifty VCRs of this brand. The average life in
this sample is 6 years and the sample standard deviation is 2 years. Calculate a 99% confidence
interval for the average life.
(c) How many more VCRs would the magazine have to test in order to halve the width of the
confidence interval?
Answer:
(a) Pr (Y > 7) = Pr(Z > 1) = 0.1587.
(b) 6 ± 2.58 × = 6 ± 0.73 = (5.27, 6.73).
(c) × (2.58 × ) = 2.58 × × = 2.58 × , or n = 200.

lOMoARcPSD|17567607
8) U.S. News and World Report ranks colleges and universities annually. You randomly sample
100 of the national universities and liberal arts colleges from the year 2000 issue. The average
cost, which includes tuition, fees, and room and board, is $23,571.49 with a standard deviation of
$7,015.52.
(a) Based on this sample, construct a 95% confidence interval of the average cost of attending a
university/college in the United States.
(b) Cost varies by quite a bit. One of the reasons may be that some universities/colleges have a
better reputation than others. U.S. News and World Reports tries to measure this factor by asking
university presidents and chief academic officers about the reputation of institutions. The ranking
is from 1 ("marginal") to 5 ("distinguished"). You decide to split the sample according to whether
the academic institution has a reputation of greater than 3.5 or not. For comparison, in 2000,
Caltech had a reputation ranking of 4.7, Smith College had 4.5, and Auburn University had 3.1.
This gives you the statistics shown in the accompanying table.
Reputation Average Cost Standard deviation N

Category of Cost ( )
Ranking > 3.5 $29,311.31 $5,649.21 29
Ranking ≤ 3.5 $21,227.06 $6,133.38 71
Test the hypothesis that the average cost for all universities/colleges is the same independent of
the reputation. What alternative hypothesis did you use?
(c) What other factors should you consider before making a decision based on the data in (b)?
Answer:
(a) 23,571.49 ± 1.96 × = 23,571.49 ± 701.55 = (22,869.94, 24,273.04).
(b) Assuming unequal population variances, t = = 6.33, which is
statistically significant whether or not you use a one-sided or two-sided hypothesis test. Your
prior expectation is that academic institutions with a higher reputation will charge more for
attending, and hence a one-sided alternative would have been appropriate here.
(c) There may be other variables which potentially have an effect on the cost of attending the
academic institution. Some of these factors might be whether or not the college/university is
private or public, its size, whether or not it has a religious affiliation, etc. It is only after
controlling for these factors that the "pure" relationship between reputation and cost can be
identified.

lOMoARcPSD|17567607
9) The development office and the registrar have provided you with anonymous matches of
starting salaries and GPAs for 108 graduating economics majors. Your sample contains a variety
of jobs, from church pastor to stockbroker.
(a) The average starting salary for the 108 students was $38,644.86 with a standard deviation of
$7,541.40. Construct a 95% confidence interval for the starting salary of all economics majors at
your university/college.
(b) A similar sample for psychology majors indicates a significantly lower starting salary. Given
that these students had the same number of years of education, does this indicate discrimination
in the job market against psychology majors?
(c) You wonder if it pays (no pun intended) to get good grades by calculating the average salary
for economics majors who graduated with a cumulative GPA of B+ or better, and those who had
a B or worse. The data is as shown in the accompanying table.
Cumulative GPA Average Earnings Standard deviation n
B+ or better $39,915.25 $8,330.21 59

B or worse $37,083.33 $6,174.86 49
Conduct a t-test for the hypothesis that the two starting salaries are the same in the population.
Given that this data was collected in 1999, do you think that your results will hold for other
years, such as 2002?
Answer:
(a) 38,644.86 ± 1.96 × = 38,644.86 ± 1,422.32 = (37,222.54, 40,067.18).
(b) It suggests that the market values certain qualifications more highly than others. Comparing
means and identifying that one is significantly lower than others does not indicate discrimination.
(c) Assuming unequal population variances, t = = 2.03. The critical value
for a one-sided test is 1.64, for a two-sided test 1.96, both at the 5% level. Hence you can reject
the null hypothesis that the two starting salaries are equal. Presumably you would have chosen as
an alternative that better students receive better starting salaries, so that this becomes your new
working hypothesis. 1999 was a boom year. If better students receive better starting offers during
a boom year, when the labor market for graduates is tight, then it is very likely that they receive a
better offer during a recession year, assuming that they receive an offer at all.

lOMoARcPSD|17567607
10) During the last few days before a presidential election, there is a frenzy of voting intention
surveys. On a given day, quite often there are conflicting results from three major polls.
(a) Think of each of these polls as reporting the fraction of successes (1s) of a Bernoulli random
variable Y, where the probability of success is Pr(Y = 1) = p. Let be the fraction of successes in
the sample and assume that this estimator is normally distributed with a mean of p and a variance
of . Why are the results for all polls different, even though they are taken on the same day?
(b) Given the estimator of the variance of , , construct a 95% confidence interval for .
For which value of is the standard deviation the largest? What value does it take in the case of a
maximum ?
(c) When the results from the polls are reported, you are told, typically in the small print, that the
"margin of error" is plus or minus two percentage points. Using the approximation of 1.96 ≈ 2,
and assuming, "conservatively," the maximum standard deviation derived in (b), what sample
size is required to add and subtract ("margin of error") two percentage points from the point
estimate?
(d) What sample size would you need to halve the margin of error?
Answer: (a) Since all polls are only samples, there is random sampling error. As a result, will
differ from sample to sample, and most likely also from p.
(b) ± 1.96 × . A bit of thought or calculus will show that the standard deviation will be
largest for = 0.5, in which case it becomes .

(c) n = 2,500.
(d) n = 10,000.

lOMoARcPSD|17567607
11) At the Stock and Watson (http://www.pearsonhighered.com/stock_watson) website go to

Student Resources and select the option "Datasets for Replicating Empirical Results." Then
select the "CPS Data Used in Chapter 8" (ch8_cps.xls) and open it in Excel. This is a rather large
data set to work with, so just copy the first 500 observations into a new Worksheet (these are
rows 1 to 501).
In the newly created Worksheet, mark A1 to A501, then select the Data tab and click on "sort." A
dialog box will open. First select "Add level" from one of the options on the left. Then select
"sort by" and choose "Northeast" and "Largest to Smallest." Repeat the same for the "South" as a
second option. Finally press "ok."
This should give you 209 observations for average hourly earnings for the Northeast region,
followed by 205 observations for the South.
a. For each of the 209 average hourly earnings observations for the Northeast region and
separately for the South region, calculate the mean and sample standard deviation.
b. Use the appropriate test to determine whether or not average hourly earnings in the Northeast
region the same as in the South region.
c. Find the 1%, 5%, and 10% confidence interval for the differences between the two
population means. Is your conclusion consistent with the test in part (b)?
d. In all three cases of using the confidence interval in (c), the power of the test is quite low
(5%). What can you do to increase the power of the test without reducing the size of the test?
Answer:
a. =$21.12; =$18.18; =$11.86; =$11.18
b. t = = 2.05 You cannot reject the null hypothesis of equal average earnings in
the two regions at the 1% level, but you are able to reject it at the 10% and 5% significance level.
c. For the 10% significance level, the confidence interval is ($0.46,$4.18). For the 5%
significance level, the interval becomes larger and is ($0.10,$4.54). In either one of the cases you
can reject the null hypothesis, since $0 is not contained in the confidence interval. It is only for
the 1% significance level that the null hypothesis cannot be rejected. In that case, the confidence
interval is ($-0.60, $5.24).
d. You would have to increase the sample size, since that would shrink the standard error
(assuming that the sample mean and variance will not change).

lOMoARcPSD|17567607
3.3 Mathematical and Graphical Problems
1) Your textbook defined the covariance between X and Y as follows:
Prove that this is identical to the following alternative specification:
Answer: =
= ( = (

lOMoARcPSD|17567607
2) For each of the accompanying scatterplots for several pairs of variables, indicate whether you
expect a positive or negative correlation coefficient between the two variables, and the likely
magnitude of it (you can use a small range).
(a)
(b)

lOMoARcPSD|17567607
(c)
(d)
Answer:
(a) Positive correlation. The actual correlation coefficient is 0.46.
(b) No relationship. The actual correlation coefficient is 0.00007.
(c) Negative relationship. The actual correlation coefficient is –0.70.
(d) Nonlinear (inverted U) relationship. The actual correlation coefficient is 0.23.

lOMoARcPSD|17567607
3) Your textbook defines the correlation coefficient as follows:
r=
Another textbook gives an alternative formula:
r=
Prove that the two are the same.
Answer: r = =
= =
= .

lOMoARcPSD|17567607
4) IQs of individuals are normally distributed with a mean of 100 and a standard deviation of 16.
If you sampled students at your college and assumed, as the null hypothesis, that they had the
same IQ as the population, then in a random sample of size
(a) n = 25, find Pr( < 105).
(b) n = 100, find Pr( > 97).
(c) n = 144, find Pr(101 < < 103).
Answer: (a) 0.94
(b) 0.97
(c) 0.21
5) Consider the following alternative estimator for the population mean:
= ( Y1 + Y2 + Y3 + Y4 + ... + Yn–1 + Yn)
Prove that is unbiased and consistent, but not efficient when compared to .
Answer: E( )= ( E(Y1) + E(Y2) + E(Y3) + E(Y4)+ ... + E(Yn-1) + E(Yn))
= (2 + 2 + ... + + )= = . Hence is unbiased.
var( ) = E( ) - )2 = E[ ( Y1 + Y2 + Y3 + Y4 + ... + Yn-1 + Yn) - ]2
= E[ (Y1- )+ (Y2 - ) + ... + (Yn-1 - ) + (Yn - )]2
= [ E(Y1- )2 + E(Y2 - )2 + ... + E(Yn-1 - )2 + E(Yn - )2]
= [ + + ... + + ]= [ ( + )] = 1.5625 .
Since var( ) → 0 as n → ∞, is consistent. has a larger variance than and is therefore not as
efficient.

lOMoARcPSD|17567607
6) Imagine that you had sampled 1,000,000 females and 1,000,000 males to test whether or not
females have a higher IQ than males. IQs are normally distributed with a mean of 100 and a
standard deviation of 16. You are excited to find that females have an average IQ of 101 in your
sample, while males have an IQ of 99. Does this difference seem important? Do you really need
to carry out a t-test for differences in means to determine whether or not this difference is
statistically significant? What does this result tell you about testing hypotheses when sample
sizes are very large?
Answer: The difference seems very small, both in terms of absolute values and, more
importantly, in terms of standard deviations. With a sample size as large as n=1,000,000, the
standard error becomes extremely small. This implies that the distribution of means, or
differences in means, has almost turned into a spike. In essence, you are (very close to) observing
the population. It is therefore unnecessary to test whether or not the difference is statistically
significant. After all, if in the population, the male IQ were 99.99 and the female IQ were 100.01,
they would be different. In general, when sample sizes become very large, it is very easy to reject
null hypotheses about population means, which involve sample means as an estimator, even if
hypothesized differences are very small. This is the result of the distribution of sample means
collapsing fairly rapidly as sample sizes increase.
7) Let Y be a Bernoulli random variable with success probability Pr(Y = 1) = p, and let Y1,..., Yn
be i.i.d. draws from this distribution. Let be the fraction of successes (1s) in this sample. In
large samples, the distribution of will be approximately normal, i.e., is approximately
distributed N(p, ). Now let X be the number of successes and n the sample size. In a sample
of 10 voters (n=10), if there are six who vote for candidate A, then X = 6. Relate X, the number
of success, to , the success proportion, or fraction of successes. Next, using your knowledge of
linear transformations, derive the distribution of X.
Answer: X = n × . Hence if is distributed N(p, ), then, given that X is a linear
transformation of , X is distributed N(np, np(1- p)).
8) When you perform hypothesis tests, you are faced with four possible outcomes described in
the accompanying table.
"☺" indicates a correct decision, and I and II indicate that an error has been made. In probability
terms, state the mistakes that have been made in situation I and II, and relate these to the Size of
the test and the Power of the test (or transformations of these).
Answer: I: Pr(reject H0 H0 is correct) = Size of the test.
II: Pr(reject H1 H1 is correct) = (1-Power of the test).

lOMoARcPSD|17567607
9) Assume that under the null hypothesis, has an expected value of 500 and a standard
deviation of 20. Under the alternative hypothesis, the expected value is 550. Sketch the
probability density function for the null and the alternative hypothesis in the same figure. Pick a
critical value such that the p-value is approximately 5%. Mark the areas, which show the size and
the power of the test. What happens to the power of the test if the alternative hypothesis moves
closer to the null hypothesis, i.e.,, = 540, 530, 520, etc.?
Answer: For a given size of the test, the power of the test is lower.
10) The net weight of a bag of flour is guaranteed to be 5 pounds with a standard deviation of
0.05 pounds. You are concerned that the actual weight is less. To test for this, you sample 25
bags. Carefully state the null and alternative hypothesis in this situation. Determine a critical
value such that the size of the test does not exceed 5%. Finding the average weight of the 25 bags
to be 4.7 pounds, can you reject the null hypothesis? What is the power of the test here? Why is
it so low?
Answer: Let Y be the net weight of the bag of flour. Then H0 : E(Y) = 5 and H1 : E(Y) < 5.
Under the null hypothesis, is distributed normally, with a mean of 5 pounds and a standard
deviation of 0.01 pounds. The critical value is approximately 4.98 pounds. Since 4.7 pounds falls
in the rejection region, the null hypothesis is rejected. The power of the test is low here, since
there is no simple alternative. In the extreme case, where the alternative hypothesis would place
the net weight marginally below five pounds, the power of the test would approximately equal its
size, or 5% in this case.

lOMoARcPSD|17567607
11) Some policy advisors have argued that education should be subsidized in developing
countries to reduce fertility rates. To investigate whether or not education and fertility are
correlated, you collect data on population growth rates (Y) and education (X) for 86 countries.
Given the sums below, compute the sample correlation:
= 1.594; = 449.6; = 6.4697; = 0.03982; = 3,022.76
Answer: r = –0.716.
12) (Advanced) Unbiasedness and small variance are desirable properties of estimators.
However, you can imagine situations where a trade-off exists between the two: one estimator
may be have a small bias but a much smaller variance than another, unbiased estimator. The
concept of "mean square error" estimator combines the two concepts. Let be an estimator of μ.
Then the mean square error (MSE) is defined as follows: MSE( ) = E( – μ)2. Prove that MSE(
) = bias2 + var( ). (Hint: subtract and add in E( ) in E( – μ)2.)
Answer: MSE ( ) = E( - E( ) + E( ) - μ)2 = E[( - E( )) + (E( ) - μ)]2
= E[( - E( ))2 + (E( ) - μ)2 + 2( - E( ))(E( ) - μ)]
Next, moving through the expectation operator results in
E[ - E( )]2 + E[E( ) - μ)]2 + 2E[( ) - E( ))( E( ) - μ)].
The first term is the variance, and the second term is the squared bias, since
E[E( ) - μ)]2 = [E( ) - μ)]2. This proves MSE ( ) = bias2 + var( ) if the last term equals zero.
But
E[( - E( ))(E( ) - μ)] = E[E( ) - μ - (E( ))2 + μE( )]
= E( ) E( ) - μE( ) - (E( ))2 + μE( ) = 0.
13) Your textbook states that when you test for differences in means and you assume that the two
population variances are equal, then an estimator of the population variance is the following
"pooled" estimator:
Explain why this pooled estimator can be looked at as the weighted average of the two variances.
Answer: =
= + .

lOMoARcPSD|17567607
14) Your textbook suggests using the first observation from a sample of n as an estimator of the
population mean. It is shown that this estimator is unbiased but has a variance of , which
makes it less efficient than the sample mean. Explain why this estimator is not consistent. You
develop another estimator, which is the simple average of the first and last observation in your
sample. Show that this estimator is also unbiased and show that it is more efficient than the
estimator which only uses the first observation. Is this estimator consistent?
Answer: The estimator is not consistent because its variance does not vanish as n goes to
infinity, i.e., var(Y1) → 0 as n → ∞ does not hold.
= (Y1 + Yn). E( ) = (E(Y1) + E(Yn)) = ( + )= . Hence is unbiased. var( ) = E( -
)2 = E[( Y1 + Yn) - ]2
= E[( (Y1 - ) + (Yn - )]2 = [E(Y1 + ]2 + E(Yn - )2] = [ + ]
= .
Since var( ) → 0 as n → ∞, does not hold, is not consistent.

var( ) < var(Y1), and is therefore more efficient than the estimator, which only uses the first
observation.

lOMoARcPSD|17567607
15) Let p be the success probability of a Bernoulli random variable Y, i.e., p = Pr(Y = 1). It can
be shown that , the fraction of successes in a sample, is asymptotically distributed N(p, .
Using the estimator of the variance of , , construct a 95% confidence interval for p. Show
that the margin for sampling error simplifies to 1/ if you used 2 instead of 1.96 assuming,
conservatively, that the standard error is at its maximum. Construct a table indicating the sample
size needed to generate a margin of sampling error of 1%, 2%, 5% and 10%. What do you notice
about the increase in sample size needed to halve the margin of error? (The margin of sampling
error is 1.96×SE( ).)
Answer: The 95% confidence interval for p is ± 1.96 × . is at a maximum
for = 0.5, in which case the confidence interval reduces to ± 1.96 × ≈ ± , and the
margin of sampling error is .
0.01 10,000
0.02 2,500
0.05 400
0.10 100
To halve the margin of error, the sample size has to increase fourfold.
16) Let Y be a Bernoulli random variable with success probability Pr(Y = 1) = p, and let Y1 ,...,
Yn be i.i.d. draws from this distribution. Let be the fraction of successes (1s) in this sample.
Given the following statement
Pr(-1.96 < z < 1.96) = 0.95
and assuming that being approximately distributed N(p, , derive the 95% confidence
interval for p by solving the above inequalities.
Answer: Pr(-1.96 < < 1.96) = 0.95. Multiplying through by the standard deviation
results in Pr(-1.96 × < - p < 1.96 × )= 0.95. Subtraction of then yields,
after multiplying both sides by (-1), Pr( - 1.96 × < p < + 1.96 × ) = 0.95.
The 95% confidence interval for p then is ± 1.96 × .
17) Your textbook mentions that dividing the sample variance by n –1 instead of n is called a

lOMoARcPSD|17567607
degrees of freedom correction. The meaning of the term stems from the fact that one degree of
freedom is used up when the mean is estimated. Hence degrees of freedom can be viewed as the
number of independent observations remaining after estimating the sample mean.
Consider an example where initially you have 20 independent observations on the height of
students. After calculating the average height, your instructor claims that you can figure out the
height of the 20th student if she provides you with the height of the other 19 students and the
sample mean. Hence you have lost one degree of freedom, or there are only 19 independent bits
of information. Explain how you can find the height of the 20th student.
Answer: Since = 20 × = = Y20 + . Hence knowledge of the sample
mean and the height of the other 19 students is sufficient for finding the height of the 20th
student.
18) The accompanying table lists the height (STUDHGHT) in inches and weight (WEIGHT) in
pounds of five college students. Calculate the correlation coefficient.
STUDHGHT WEIGHT
74 165
73 165
72 145
68 155
66 140
Answer: r = 0.72.
19) (Requires calculus.) Let Y be a Bernoulli random variable with success probability Pr(Y = 1)
= p. It can be shown that the variance of the success probability p is . Use calculus to
show that this variance is maximized for p = 0.5.
Answer: = - = 0. Hence 1 - 2p = 0 or p = .

lOMoARcPSD|17567607
20) Consider two estimators: one which is biased and has a smaller variance, the other which is
unbiased and has a larger variance. Sketch the sampling distributions and the location of the
population parameter for this situation. Discuss conditions under which you may prefer to use
the first estimator over the second one.
Answer: The bias indicates "how far away," on average, the estimator is from the population
value. Although this average is zero for an unbiased estimator, there may be quite some variation
around the population mean. In a single draw, there is therefore a high probability of being some
distance away from the population mean. On the other hand, if the variance is very small and the
estimator is biased by a small amount, then the probability of being closer to the population
value may be higher. (The biased estimator may have a smaller mean square error than the
unbiased estimator.)

lOMoARcPSD|17567607

select the chapter 8 CPS data set (ch8_cps.xls) into a spreadsheet program such as Excel. For the
exercise, use the first 500 observations only. Using data for average hourly earnings only (ahe)
and years of education (yrseduc), produce a scatterplot with earnings on the vertical axis and
education level on the horizontal axis. What kind of relationship does the scatterplot suggest?
Confirm your impression by adding a linear trendline. Find the correlation coefficient between
the two and interpret it.
Answer:
Without the trendline added, there does not seem to be much of a linear relationship between
average hourly earnings and years of education. Perhaps a linear relationship is not plausible
since it would imply that the returns to education would become smaller as further years of
education are added. However, and regardless of the linearity issues, there is a positive
relationship in the data between the two variables, which becomes visible when the trend line is
added. The correlation coefficient is positive and has a value of 46.9%, which is reasonably high
(the correlation between height and weight for college students is approximately 50% by
comparison).

lOMoARcPSD|17567607
22) IQ scores are normally distributed with an average of 100 and a standard deviation of 16.
Some research suggests that left-handed individuals have a higher IQ score than right-handed
individuals. To test this hypothesis, a researcher randomly selects 132 individuals and finds that
their average IQ is 103.2 with a sample standard deviation of 14.6. Using the results from the
sample, can you reject the null hypothesis that left-handed people have an IQ of 100 vs. the
alternative that they have a higher IQ? What critical value should you choose if the size of the
test is 5%?
Answer: The hypothesis is : μ = 100 versus the alternative : μ > 100. The test statistic is t =
=2.52. Since the critical value for the one-sided alternative is 1.645 at the 5%
significance level, the researcher should reject the null hypothesis that left-handed individuals
have an IQ of 100.

select the "Test Score data set used in Chapters 4-9" (caschool.xls) and open the Excel data set.
Next produce a scatterplot of the average reading score (horizontal axis) and the average
mathematics score (vertical axis). What does the scatterplot suggest? Calculate the correlation
coefficient between the two series and give an interpretation.
Answer:
The scatterplot suggests that, on average, schools which perform highly on the reading score will
also perform highly on the mathematics score. The sample correlation between the two series is
92.3%, suggesting a high positive correlation between the two variables.
24) In 2007, a study of close to 250,000 18-19 year-old Norwegian males found that first-borns

lOMoARcPSD|17567607
have an IQ that is 2.3 points higher than those who are second-born. To see if you can find a
similar evidence at your university, you collect data from 250 students, of which 140 are first-
borns. After subjecting each of these individuals to an IQ test, you find that the first-borns score
108.3 with a standard deviation of 13.2, while the second borns achieve 107.1 with a standard
deviation of 11.6. You hypothesize that first-borns and second-borns in a university population
have identical IQs against the one-sided alternative hypothesis that first borns have higher IQs.
Using a size of the test of 5%, what is your conclusion?
Answer: Given that your null hypothesis states : = , your test statistic is t =
= 0.76. Since the critical value for the one-sided alternative test is 1.64, you
cannot reject the null hypothesis.

Chapter 3 Econometrics Practice MC

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3 Econometrics Practice MC

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|17567607

Chapter 3 Econometrics Practice MC

Introductory Econometrics (Wilfrid Laurier University)

Studocu is not sponsored or endorsed by any college or university

Introduction to Econometrics, 4e (Stock/Watson)

3.1 Multiple Choice Questions

3) An estimator Y of the population value is unbiased if:

4) An estimator Y of the population value is consistent if:

5) An estimator Y of the population value is more efficient when compared to another

6) With i.i.d. sampling each of the following is true EXCEPT:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

7) The standard error of , SE( ) = is given by the following formula:

8) The critical value of a two-sided t-test computed from a large sample:

9) A type I error is:

10) A type II error:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

11) The size of the test:

12) The power of the test is:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

19) The p-value is defined as follows:

20) A large p-value implies:

21) The formula for the sample variance is:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

22) Degrees of freedom:

23) The t-statistic is defined as follows:

24) The power of the test:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

D) rXYSYSY, where rXY is the correlation coefficient.

28) The t-statistic has the following distribution:

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

30) The correlation coefficient:

A) a student t distribution if the population distribution of Y is not normal

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

35) A low correlation coefficient implies that:

36) The size of a test:

37) The fraction of incorrect rejections among all rejections is called:

38) The p-value for a one-sided alternative is:

3.2 Essays and Longer Questions

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Height of Young Boys and Girls, Grades 4-6, in inches

57.8 3.9 55 58.4 4.2 57

(b) - = -0.6, SE( - )= + = 0.77.

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

(c) You would expect 19 of the 20 confidence intervals to contain 5 pounds.

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

expect this to happen only every 50th sample.

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Age Category Average Earnings Standard N

(b) Assuming unequal population variances, t = = 4.62, which is statistically

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

(c) × (2.58 × ) = 2.58 × × = 2.58 × , or n = 200.

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Reputation Average Cost Standard deviation N

(b) Assuming unequal population variances, t = = 6.33, which is

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

Cumulative GPA Average Earnings Standard deviation n

B+ or better $39,915.25 $8,330.21 59

(c) Assuming unequal population variances, t = = 2.03. The critical value

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)

largest for = 0.5, in which case it becomes .

Downloaded by Yi?it Kocaman (yigitkcmn07@gmail.com)