Universidad Carlos III de Madrid

ME-MIEM
Econometrics
Multiple Linear Regression. Estimation I
Problem Set 2

1. A multiple regression includes two regressors

Y = 0 + 1 X1 + 2 X2 + U:

(a) What is the expected variation in Y if X1 increases in 3 units and X2 does not change?
(b) What is the expected variation in Y if X2 increases in 5 units and X1 does not change?
(c) What is the expected variation in Y if X1 increases in 3 units and X2 decreases in 5 units?
(d) Explain why it is di¢ cult to accurately estimate the partial e¤ect of X1 , keeping X2 constant, if X1 and
X2 are highly correlated.

2. The following results were obtained using data from the 1998 Current Population Survey (CPS). The data
set consists of information on 4000 full-time full-year workers. The highest educational achievement for each
worker was either a high school diploma or a bachelor’s degree. The worker’s ages ranged from 25 to 34 years.
The data set also contained information on the region of the country where the person lived, marital status
and number of children:

AHE = average hourly earnings (in 1998 dollars)

College = binary variable (1 if college, 0 if high school)
Female = binary variable (1 if female, 0 if male)
Age = age (in years)
Ntheast= binary variable (1 if Region = Northeast. 0 otherwise)
Midwest = binary variable (1 if Region = Midwest, 0 otherwise)
South = binary variable (1 if Region = South, 0 otherwise)
West= binary variable (1 if Region = West, 0 otherwise)

Dependent Variable: Average Hourly Earnings (AHE)

Regressor (1) (2) (3)
College (X1 ) 5.46 5.48 5.44
Female (X2 ) -2.64 -2.62 -2.62
Age (X3 ) 0.29 0.29
Northeast (X4 ) 0.69
Midwest (X5 ) 0.60
South (X6 ) -0.27
Intercept 12.69 4.40 3.75
Summary Statistics
SSR 6.27 6.22 6.21
R2 0.176 0.190 0.194
n 4,000 4,000 4,000

(a) Compute R2 for each of the regressions.

Using the regression results in column (1):
(b) Do workers with college degrees earn more on average than workers with only high school degrees? How
much more?
(c) Do men earn more than women on average? How much more?
Using the regression results in column (2):

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 (d) Is age an important determinant of earnings? Explain.
(e) Sally is 29 -year-old female college graduate. Betsy is a 34-year-old female college graduate. Predict Sally’s
and Betsy’s earnings.
Using the regression results in column (3):
(f) Do there appear to be important regional di¤erences?
(g) Why is the regressor West omitted from the regression? What would happen if it was included?
(h) Juanita is a 28-year-old female college graduate from the South. Jennifer is a 28-year-old female college
graduate from the Midwest. Calculate the expected di¤erence in earnings between Juanita and Jennifer.

3. Data were collected from a random sample of 220 home sales from a community in 2003. Let Price denote the
selling price (in $1000), BDR denote the number of bedrooms. Bath denote the number of bathrooms. Hsize
denote the size of the house (in square feet), Lsize denote the lot size (in square feet), Age denote the age
of the house (in years), and P oor denote a binary variable that is equal to 1 if the condition of the house is
reported as "poor". An estimated regression yields the following results:

d
Price = 119:2 + 0:485BDR + 23:4Bath + 0:156Hsize + 0:002Lsize
+0:090Age 48:8P oor;
2
R = 0:72; SSR = 41:5

(a) Suppose that a homeowner converts part of an existing family room in her house into a new bathroom.
What is the expected increase in the value of the house?
(b) Suppose that a homeowner adds a new bathroom to her house, which increases the size of the house by
100 square feet. What is the expected increase in the value of the house?
(c) What is the loss in value if a homeowner lets his house run down so that its condition becomes "poor"?
(d) Compute the R2 for the regression and provide an interpretation for its value.

4. Consider the regression model

Yi = 1 X1i + 2 X2i + Ui ;
for i = 1; : : : ; n: (Notice that there is NO a constant term in the regression.).

(a) Specify the least squares function which is minimized by OLS.

(b) Calculate the partial derivatives of the objection function with respect to b1 and b2 :
Pn Pn Pn
(c) Suppose that i=1 X1i X2i = 0: Show that ^ 1 = i=1 X1i Yi = i=1 X1i 2
:
Pn ^ as a function of the data (Yi ; X1i ; X2i ) ;
(d) Suppose that i=1 X1i X2i 6= 0: Derive an expression for 1
i = 1; : : : ; n:
(e) Suppose that the model includes an intercept: Yi = 0 + 1 X1i + 2 X2i + Ui : Show that OLS estimators
satisfy ^ 0 = Y ^ X1 ^ X2 :
1 2
(f) Suppose that the model has an intercept as in (e): Suppose moreover that
n
X
X1i X1 X2i X2 = 0:
i=1

Prove that Pn
^ = i=1 X1i X1 Yi Y
1 Pn 2 :
i=1 X1i X1
How does it compare with the OLS estimator of 1 of the regression where X2 is omitted?

5. Using the data set TeachingRatings carry out the following exercises:

(a) Run a regression of Course_Eval (remind they are test scores) on Beauty (it measures professor’s beauty).
What is the estimated slope?

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 (b) Run a regression of Course_Eval on Beauty including some additional variables to control for the type
of course and professor characteristics. In particular, include as additional regressors Intro, OneCredit,
F emale, M inority, and N N _English. What is the estimated e¤ect of Beauty on Course_Eval? Does
the regression in (a) su¤er from important omitted variable bias?
(c) Estimate the coe¢ cient of Beauty variable of the multiple regression model in (b) through the process in
three stages or Frisch-Waugh Theorem:
1. Regress the dependent variable Course_Eval on the additional controls and get residuals Y~ .
~
2. Regress the explanatory variable Beauty on the additional controls and get residuals X.
~ ~
3. Regress the residuals Y on the residuals X;
and check that you get the same estimated coe¢ cient for Beauty that the one obtained in (b):
(d) Professor Smith is a black male with average Beauty and is a native English speaker. He teaches a
three-credit upper-division course. Predict Professor Smith’s course evaluation.

ANSWERS:

2. a) 0.175, 0.189 and 0.193 respectively; b) 5.46 $/hour more by average; c) 2.64$/hour more by average; e) 15:67
and 17:12 respectively; h) -0.87.
3. a) 23; 400$; b) 39; 000$; c) 48; 800$; d) 0:727:
5. a) 0.133. b) 0.166 the coe¢ cient does not change so much and the e¤ect does not seem to be very large; d) 3.901.