Worksheet

Econometrics II
1. What are the shortcoming of linear probability model?
2. What do LPM,logit and Probit model have in common?
3. Given CDF of logistic distribution
1
Pr(𝑌 = 1) =
1+𝑒 −(𝛽0+𝛽0𝑋1 +𝛽0𝑋2 +𝑈𝑖 )
a. Derive likelihood ratio/odds ratio
b. Find log likelihood ratio/logs odds ratio
4. Given data on home ownership Y (1 = owns a house, 0 = does not own a house)
and family income X (thousands of dollars) for 40 families, linear probability
model is estimated as follows. Based on the regression answer the following
questions
a. Interpret the estimated parameter
b. Comment on the significance of the estimated parameters
c. Calculate the probability of owning a house for a family with an income
of 20 thousands dollar
 5. Letting Y = 1 if a student’s final grade in an intermediate microeconomics
course was A and Y = 0 if the final grade was a B or a C, Spector and Mazzeo
used grade point average (GPA), TUCE, and Personalized System of
Instruction (PSI) as the

1 𝑖𝑓 𝑓𝑖𝑛𝑎𝑙 𝑔𝑟𝑎𝑑𝑒 𝑖𝑠
𝑌 = { 0 𝑖𝑓 𝑖𝑡 𝑖𝑠 𝐵 $ 𝐶

Logit model was formulated as follow

1
Pr(𝑌 = 1 /𝐺𝑃𝐴, 𝑇𝑈𝐶𝐸 , 𝑃𝑆𝐼 ) =
1 + 𝑒 −(𝛽0 +𝛽1 𝐺𝑃𝐴+𝛽2 𝑇𝑈𝐶𝐸+𝛽3 𝑃𝑆𝐼+𝜀𝑖 )
Grade Y = 1 if the final grade is A

= 0 if the final grade is B or C

TUCE = score on an examination given at the beginning of the term to test entering
knowledge of macroeconomics

PSI = 1 if the new teaching method is used

= 0 otherwise
 GPA = grade point average

Then the model is estimated as follow

a. Compute the predicted probability that Y = 1 for the value GPA=3.26 ,

TUCE=25 and PSI=1
b. Given Tuce and PSI constant 25 and 1, respectively ,compute the change
in predicted probability if GPA increase from 3.26 to 3.92
c. What does the chi-square statistic given in the bracket suggest?
d. Identify the significant and insignificant coefficient at five percent level
of significance

6. Graduate admission test was given to 13 applicants. The test has both
quantitative and verbal type of questions. Based on this the probit model
formulated to predict the probability of admission given quantitative and
verbal test score.

Pr(𝑌 = 1/𝑄, 𝑉) = Φ(𝛽0 + 𝛽1 𝑄 + 𝛽2 𝑉 + 𝑈𝑖 )

 Y is latent variable and defined as follows

1 𝑖𝑓 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑛𝑡 𝑎𝑑𝑚𝑖𝑡𝑡𝑒𝑑
𝑌={
0 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒

Q = is quantitative test score

V = is verbal test score

The estimated result of probit model was presented as follow

a. How would you interpret the slope (marginal effect)?

b. Find the predicted probability of admission for an applicant who has 650
and 570 test score on quantitative and verbal, respectively.
c. Comment over all significance of model based on likelihood ratio test.
7. What is endogeneity?
8. What are the causes and consequences of endogeneity problem?
9. Explain what simultaneity bias mean?
10. Distinguish between structural and reduced form of equations
11. What is instrumental variable and how it can be used to solve endogeneity
problems
12. Explain the first and second stage in two stage least square method
13. Explain indirect least square method. How it works?
14. Consider the following model for closed economy
𝐶𝑡 = 𝛼0 + 𝛼1 𝑌𝑡 + 𝑢1
𝐼𝑡 = 𝛽0 + 𝛽1 𝑌𝑡 + 𝛽2 𝑌𝑡−1 + 𝑢2
𝑌𝑡 = 𝐶𝑡 + 𝑌𝑡 + 𝐺𝑡

a. Derive the reduced form of equations

b. Obtain the value of the parameter estimates of structural model
from reduced form of model
15. Discuss the formal rules used for identification
16. Assume the following simple version of Keynesian model
Consumption function 𝐶𝑡 = 𝑎0 + 𝑎1 𝑌𝑡 − 𝑎2 𝑇𝑡 + 𝑢1
Investment function 𝐼𝑡 = 𝛽0 + 𝛽1 𝑌𝑡−1 + 𝑢2
Taxation function 𝑇𝑡 = 𝛾0 + 𝛾1 𝑌𝑡 + 𝑢3
Income Identity 𝑌𝑡 = 𝐶𝑡 + 𝐼𝑡 + 𝐺𝑡

a. Check whether each equation of the system is identified or not by

order condition –which is necessary condition for identification
b. Check whether each equation of the model identified or not by rank
condition –which is sufficient condition for identification
17. Let the model consists of the following equations
𝑌1 = 4𝑌2 − 3𝑋1 + 𝑢1
𝑌2 = 2𝑌3 + 2𝑋3 + 𝑢2
𝑌3 = 2𝑌1 − 3𝑌2 − 𝑋2 − 𝑋3 + 𝑢2

Establish for each equation whether it is exactly, over or under identified