IRDAP 2021 Exam

EC220
Introduction to Econometrics

Suitable for all candidates

Instructions to candidates
This paper contains FOUR questions, divided into two sections. Section A contains ONE question
related to Michaelmas Term and Section B contains THREE questions related to Lent Term. You
should answer ALL questions from Section A and ALL questions from Section B.
If at any point in this exam you feel that anything is unclear, please make additional assumptions that
you feel are necessary and state them clearly.
For Section A: Please type your answer in a Word-processing software on a computer (e.g. Word).
You could combine the typed document with scanned or photographed hand-drawn diagrams and
computations. The maximum word count is 1500 words, beyond which nothing will be marked. There
is no minimum word count and concise answers will be rewarded.
For Section B: Please use pen and paper and scan (or photograph) your answers. You could also use
an iPad or a tablet. There is no maximum word count for Section B. Please annotate your answers
clearly.
The answers must then be converted to pdf and uploaded to Moodle as ONE individual file together
with the Coversheet. Please make sure every single scanned page is legible and properly ordered.
The file will be run through Turnitin to ensure academic integrity.

Time Allowed Submit PDF with answers within 24 hours after official start of the exam

Expected effort Reading Time: 15 minutes

Answering Time: 3 hours
Submission Time: 30 minutes

You are supplied with: Lindley & Scott Cambridge Statistical Tables
Table A5 Durbin-Watson d-statistic
You may also use: Open book examination

Calculators: Calculators are allowed in this exam

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 Section A
(Answer all questions.)

Question 1
[33.34 marks]
Johannes Gutenberg introduced the metal moveable type printing press, an important information
technology, in Europe in the city of Mainz, Germany, in 1439. In its early stage, the printing tech-
nology was complex and semi-proprietary. The technology required skilled craftsmen and sufficient
financial backing. Over the coming decades, the technology spread to other cities primarily because
Gutenberg’s apprentices, or their apprentices, moved elsewhere and set up their own print shops. By
1500, about 10% of the larger cities in Europe had printing presses. Books where difficult to trans-
port over long distances during this period because they were heavy and could be easily damaged by
rain or damp conditions. As a result, cities with printing presses benefited from much more printed
material, books and pamphlets, than cities without local presses. Among the materials printed were
books about arithmetic and merchant manuals, spreading commercial knowhow and skills, like the
calculation of interest rates and bookkeeping techniques, to a merchant class. We would like to know
whether printing and the proliferation of modern business practices contributed to city growth, as
measured by population size. The data set consists of cities in central Europe and observations are
at the city level.
Table 1 shows coefficients from regressions of the difference in log population (city size) between
different years on a dummy variable for whether the city had a printing press before 1500. Additional
regressors (no coefficients shown) are dummy variables for whether the city had a university in 1450
(U niversity in 1450), whether it used to be a Roman site, whether it is a capital city, whether it is an
Atlantic port, a Mediterranean port, a Baltic port or whether it is located on a navigable river, and log
population size in 1400.

Table 1. Dependent variable is the difference in log population between

1400 - 1500 1500 - 1600 1500 - 1700 1500 - 1800
(1) (2) (3) (4)
0.07 0.19 0.26 0.30
Print adopted by 1500
(0.08) (0.06) (0.08) (0.09)
Notes: Robust standard errors are in parentheses. Coefficients for the
additional regressors are omitted.

Table 2 shows regressions of various dependent variables on the log distance of the city from Mainz
and the same regressors as in Table 1.

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 Table 2. Regressions on the log distance from Mainz
Dependent variable
Print adopted by Difference in log University in Difference in log
1500 city size between 1450 city size between
1400 and 1500 1500 and 1600
(1) (2) (3) (4)
Log distance to -0.06 -0.05 0.00 -0.03
Mainz (0.01) (0.04) (0.01) (0.01)
Notes: Robust standard errors are in parentheses. Coefficients for the additional
regressors are omitted. In Column (2), the regressor log population size in 1400
is not included.

(a) Interpret the results in Table 1. What do the results tell us whether the early adoption of printing
contributed to city growth? Discuss whether you could interpret the results causally.
[9 marks]
(b) Explain whether you would also include a variable for the number of editions (output) printed
per capita during 1450-1500 as a regressor in the regressions in Table 1 in order to study the
causal effect of printing on city growth.
[5 marks]
(c) Using provided information, explain whether the distance from Mainz, where printing was in-
vented, would be a good instrument for the adoption of print before 1500.
[9 marks]
(d) What is the instrumental variables estimate of print adoption before 1500 on the difference in
log city size between 1500 and 1600 using log distance from Mainz as an instrument? Explain
how you arrive at your result. Comment on the difference to the corresponding OLS result.
[8 marks]
(e) A researcher obtains the residuals from the OLS regression in Column (1), Table 2, and regresses
the residuals on the variable Log distance to M ainz and the other regressors. Calculate the R-
squared of this new regression. Carefully explain what additional information you would require
if you cannot make such a calculation.
[2.34 marks]

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 Section B
(Answer all questions.)

Question 2
[22.33 marks]
Consider the following bivariate regression model without intercept

yi = βx2i + ui ,

for i = 1, . . . , n. We impose the following assumptions.

SLR.1 The population model is y = βx2 + u.
SLR.2 We have a random sample of size n, {(yi , xi ) : i = 1, . . . , n}, following the population model
in SLR.1.
SLR.3 The sample outcomes on {xi : i = 1, . . . , n} are not all the same value.
SLR.4 The error term u satisfies E(u|x) = 0 for any value of x.

(a) β̂ be the OLS estimator for the regression from y on x2 (without intercept). Show that β̂ is
consistent for β under SLR.1-4.
[3 marks]
(b) Under SLR.1-4, derive the (conditional) variance V ar(β̂|X), where X = (x1 , . . . , xn ).
[3.33 marks]
(c) Find an estimator for V ar(β̂|X) under SLR.1-4, and explain how to test the hypothesis H0 : β =
5 against H1 : β 6= 5.
[4 marks]
(d) Now consider the OLS estimator β̃ for the regression from y on x (instead of x2 ) without inter-
cept. Under SLR.1-4, derive the (conditional) expectation E(β̃|X).
[4 marks]
(e) Under SLR.1-4, derive the probability limit of β̃ .
[4 marks]
(f) Additionally, suppose:
SLR.5 The error term u satisfies V ar(u|x) = σ 2 for any value of x (homoskedasticity).
Under SLR.1-5, derive the (conditional) variance V ar(β̃|X).
[4 marks]

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Question 3
[22.33 marks]
(a) Answer the following questions.

(i) Consider the following regression models

M1 : yi = β0 + β1 xi1 + β2 xi2 + ui ,
M2 : yi = α0 + α1 (xi1 − xi2 ) + ei .

Explain which model is more restrictive. Then explain how to test the restriction.
[4 marks]
(ii) Consider the bivariate regression model

log y = β0 + β1 log x + u,

where y and x are measured by dollars. What will happen to the OLS intercept and slope
estimates if we change the units of measurements from dollars to hundred dollars for both
y and x?
[3 marks]
(iii) Is the following statement true or false? Explain your answer.
Consider the multiple regression model yi = β0 + β1 xi1 + β2 xi2 + ui for i = 1, . . . , n. Let
tβ1 and tβ2 be the t statistics for testing H0 : β1 = 0 and H0 : β2 = 0, respectively. If both
tβ1 and tβ2 are zero, then the F statistic for the joint hypothesis H0 : β1 = β2 = 0 is also
zero.
[4 marks]

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(b) In this question we will analyze a hypothetical sample of 1,387 UK-domiciled applicants who
applied to study Economics at a UK university. We consider the following variables:

Name Description Minimum Maximum Mean

got_in dummy, 1 if admitted 0 1 .36
test score on admission test 10 100 64
gcsescore score based on GCSE performance 1 4 3.77
interview interview score 10 95 64
math dummy, 1 if did math at A-level 0 1 .66
male dummy, 1 if male 0 1 .74
math_male math×male 0 1 .49

Using these data, a researcher estimates the following logit model for admission:

(i) Discuss clearly how the logit parameter estimates are obtained. No technical details ex-
pected, but intuition rewarded.
[4.33 marks]
(ii) What is the difference in predicted probability of admission between a male and female
student, who did math at A-level and scored the average mark in each assessment criterion?
Interpret your finding.
[4 marks]
(iii) How would you test if doing math at A-level influences admission probability significantly?
Clearly indicate your null and alternative hypothesis, the test statistic, its distribution under
the null and the rejection rule.

Note: If you cannot conduct the test using the information provided, clearly indicate what
additional information will be required to conduct the test.
[3 marks]

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Question 4
It is postulated that more open economies have lower inflation rates. A proposed model looks at a
cross section of n countries using time averages:

infli = β0 + β1 log (inci ) + β2 log (openi ) + ui , i = 1, ..., n. (4.1)

infli is average inflation rate, openi is the measure of openness of the economy (average share of
imports in GDP), and inci is average per capita income, and i denotes a particular country. We assume
the errors do not exhibit autocorrelation.

(a) The model (4.1) was estimated by OLS and provided β̂2 = −.215 (with se(β̂2 ) = .095). If
openness of the economy itself depends on inflation rate (infli ), what sort of problems will this
cause for the OLS estimator for (4.1)? Explain.
[3 marks]
(b) Suppose that the equation

openi = α0 + α1 infli + α2 log (inci ) + α3 log (landi ) + vi , (4.2)

where landi is the land area of the country, holds in addition to (4.1). Could this relation be helpful
in providing a suitable method of estimation of β2 in (4.1)? What is the relevant estimation
method and what conditions must be satisfied for it to be valid?
[4 marks]
(c) Using the cross section of countries, the following regression was obtained by OLS:

o
[ peni = 117.08 + .546 log (inci ) − 7.57 log (landi ) . (4.3)
(15.85) (1.493) (.81)

Robust standard errors are reported in parentheses. Discuss whether (and if so how) we can use
this equation to verify whether the conditions in (b) are satisfied and discuss how this equation
can help us to estimate β2 .
[4 marks]
(d) Explain the reason why robust standard errors were reported and how they would have been
computed using (4.3).
[3 marks]
(e) Discuss how you could have determined that robust standard errors were required in (4.3).
[3 marks]
(f) Provide an intuitive explanation (use the method of moments framework) why you cannot pro-
vide an estimate for α1 .
[4 marks]

END OF PAPER

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