School of Economics and Finance Štµepána Lazarová

Queen Mary University of London Semester A, 2023/24

ECN224 ECONOMETRICS 1
Solutions to exercise set 3 Week 4
1. Suppose that a researcher, using data on class size (ST R, student-teacher
ratio) and average test scores from 100 third-grade classes (T estScore),
estimates the OLS regression,
d
T estScore = 520:4 5:82 ST R; R2 = 0:08; SER = 11:5;
(20:4) (2:21)

where the numbers in parentheses are the standard errors of the coef-
…cient estimates.

(a) Test the null hypothesis H0 : 1 = 0 against the alternative hy-

pothesis H1 : 1 6= 0 at the 5% and 1% signi…cance level.
(b) Construct a 95% con…dence interval for 1, the regression slope
coe¢ cient.
(c) Calculate the p-value for the two-sided test of the null hypothesis
H0 : 1 = 0. Do you reject the null hypothesis at the 5% level?
At the 1% level?
(d) Using the results in part (a), (b) or (c), would you say there is a
relationship between average test scores and student-teacher ra-
tio?

Solution:

(a) The t-statistic for the test of the null hypothesis H0 : 1 = 0 is

^1 0 5:82
t= = = 2:6335.
SE ^ 1 2:21

The two-sided critical value of the standard normal distribution

is 1.96 at the 5% signi…cance level and 2.58 at the 1% signi…cance
level. Therefore we reject the null both at the 5% level and at the
1% level.

1
 n o
(b) The 95% con…dence interval for 1 is ^ 1 1:96 SE ^ 1 =
f 5:82 1:96 2:21g, that is 10:152 1 1:4884:
(c) From part (a) we know that the t-statistic for the test of the null
hypothesis H0 : 1 = 0 is 2:6335. The p-value for the test against
a two-sided alternative H1 : 1 6= 0 is

p-value = 2 ( jtj) = 2 ( 2:6335) = 2 0:0042 = 0:0084:

The p-value is less than 0.01, so we can reject the null hypothesis
at the 5% as well as 1% signi…cance level. This agrees with the
conclusion in part (a).
(d) Since the null hypothesis in part (a) has been rejected, we conclude
that there is 1 6= 0 and that there is therefore statistically signi…-
cant relationship between average test scores and student-teacher
ratio.