Additional Sample Final Exam Questions

Note that these questions aim to give you an idea of some of the types (forms) of questions
you can expect on the exam in addition to questions that mimic the questions in the sample exams
posted on Nestor as well as exercises in the problem sets. You can expect 3-4 short questions like
these on the exam.
1. Random measurement errors in the explained (dependent) variable bias the OLS estimator.
True, false or uncertain? Explain.

Solution: False. In the Y = β0 + β1 X + ε, ε is a stochastic component, which includes

random measurement error in the Y variable. Measurement error in Y may therefore result
in larger than-average standard errors, but it will not bias the OLS estimator.

2. Suppose y = α+βx+θz +δw+u where the Gauss-Markov assumptions hold. If you know that
θ + δ = 1 and β = 2δ, what regression would you run to produce your parameter estimates?
Notice that you want estimates of all parameters.

Solution: Impose the restrictions -the model becomes:y − z = α + δ(2x − z + w). Obtain
α̂, δ̂ and then use the restrictions to obtain β = 2δ and θ = 1 − δ.

3. Consider the following model:

log(rent) = β0 + β1 log(pop) + β2 log(avginc) + β3 pctstu + u

where: rent is the average monthly rent in a college town in the US, pop is the population of
this town, avginc is the average city income and pctstu is the student population as a percent-
age of the total population. The table below presents the Stata output with estimates of this
model.

. reg lrent lpop lavginc pctstu if y90==1

Source | SS df MS Number of obs = 64

-------------+------------------------------ F( 3, 60) = 16.89
Model | 1.15895654 3 .386318847 Prob > F = 0.0000
Residual | 1.3720428 60 .02286738 R-squared = 0.4579
-------------+------------------------------ Adj R-squared = 0.4308
Total | 2.53099934 63 .040174593 Root MSE = .15122

1
 ------------------------------------------------------------------------------
lrent | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
lpop | .0658678 .038826 1.70 0.095 -.0117957 .1435314
lavginc | .507015 .0808356 6.27 0.000 .3453198 .6687103
pctstu | .0056297 .0017421 3.23 0.002 .002145 .0091143
_cons | .0427803 .8438753 0.05 0.960 -1.645222 1.730782
------------------------------------------------------------------------------

(a) Test the hypothesis that size of the student population relative to the total population has
no effect on monthly rent. State the null and the alternative hypothesis clearly.

Solution: H0 : βpctsu = 0; Ha : βpctstu 6= 0. You can use p-valule,t-stat or confidence

interval to conclude that we can reject the null and therefore there is evidence that
student population relative to the total population does have an effect on monthly
rent.

(b) Show how you would test the hypothesis that 1 percent increase in average city income
increases the average monthly rent by 1 percent and once average income is controlled
for, the population of the town and the size of the student population does not matter for
the monthly rent. State the null and alternative hypothesis clearly. (You don’t have to
perform the actual test - but show clearly how you would do it.)

Solution: H0 : βlavginc = 1, βlpop = βpctstu = 0. We need to perform an F test but we

do not have enough information in the table to do it.

4. Suppose that:

incomei = α + β1 experiencei + β2 educationi + β3 sexi + β4 agei + εi

What would you speculate the direction of the bias of the estimate of β1 to be if age were
omitted from the regression? Explain your reasoning.

Solution: As age is positively correlated with experience and also with income, it is rea-
sonable to expect an upward bias.

5. Consider a random variable S, which is the number of siblings a person has. S takes on value
0 with probability 0.30, value 1 with probability 0.20, and value 2 (which indicates that the
person has 2 or more siblings) with probability 0.50. You compute the sample average of S
using a sample of 50 individuals and call it µ50 . Then you compute the sample average of S
using a sample of 250 individuals and call it µ250 . The distribution of µ250 should be closer to
a normal than the distribution of µ50 .

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Solution: True. According the Central Limit Theorem, the distribution of the sample
mean is well approximated by a Normal when N is large. The distribution of the sam-
ple mean of this discrete variable S should look closer to a normal for the sample with
more observations (we saw an example in class for a variable that took on the values 0 or
1)

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