School of Economics Mingyang Li

Huazhong University of Science and Technology Spring 2023

Econometrics
Homework 5
Due 17:00 April 12, 2023
Total Points: 100

1. (50 points) Use the data in WAGE1.CSV for this exercise.

(a) Use OLS to estimate the following equation and report the results using the usual format.

log(wage) = β0 + β1 educ + β2 exper + β3 exper2 + u

(b) Is exper2 statistically significant at the 1% level?

(c) Using the approximation %∆wage [ ≈ 100(β̂2 + 2β̂3 exper)∆exper, find the approximate
return to the fifth year of experience. What is the approximate return to the twentieth
year of experience?
(d) At what value of exper does additional experience actually lower predicted log(wage)?
How many people have more experience in this sample?

2. (50 points) Consider a model where the return to education depends upon the amount of
work experience (and vice versa):

log(wage) = β0 + β1 educ + β2 exper + β3 educ · exper + u.

(a) Show that the return to another year of education (in decimal form), holding exper fixed,
is β1 + β3 exper.
(b) State the null hypothesis that the return to education does not depend on the level of
exper. What do you think is the appropriate alternative?
(c) Use the data in WAGE2.CSV to test the null hypothesis in (b) against your stated
alternative.
(d) Let θ1 denote the return to education (in decimal form), when exper = 10: θ1 = β1 +
10β3 . Obtain θ̂1 and a 95% confidence interval for θ1 . [Hint: Write β1 = θ1 − 10β3 and
plug this into the equation; then rearrange. This gives the regression for obtaining the
confidence interval for θ1 .]