ECON 8740: Applied Statistics and Econometrics

Exercise #1
Due Thursday, September 11 at the beginning of class1
Shif Gurmu
Answer all questions. Show your work clearly. [40 Points]
1.

[9 Points] Suppose the following model describes the relationship between monthly earnings
(wage) and IQ score (iq):
log(wage) = 5.88699 + 0.00881 iq
where log(.) denotes natural logarithm.

A.

What is wage when iq = 105? When iq = 125? (Hint: You will need to exponentiate.)

B.

Use equation (A.28) on page 714 in Appendix A of Wooldridge (2013) to approximate the
percentage increase in wage when iq increases by 20.

C.

Use the results from part (A) to compute the exact percentage dierence in wage when iq
= 125 and iq = 105. Comment on how this compares with the approximation in part (B).

2.

[9 Points] Consider the following equation

log(gdp) = 2.65 + 0.527 log(bankcredit) + 0.222FDI,
where gdp refers to gross domestic product, bankcredit denotes bank credit, and FDI refers
to foreign direct investment.

A. If bank credit increases by 1%, by how much is gdp expected to increase, the level of FDI
remaining constant?
B. Find the approximate percentage increase in gdp if FDI increases by 5, the amount of bank
credit remaining constant.
3

[9 Points] Please use Stata Probability Distributions and Density Functions to do Problem
B.2 on page 752 in Appendix B of Wooldridge (2013). You can check your answers using
the standard normal distribution table, Table G.1 on pp. 831-832 of your textbook.
[Hint: Statas normal(z) returns the cumulative standard normal distribution. For example,
display normal(0.6) gives you the probability Prob (Z < 0.6): answer 0.72574688. You
need to standardize your random variable before using normal(z): z = (x - mu)/sigma or
issue the command: display normal((x-mu)/sigma). ]

4.

[13 Points] The purpose of this problem is to review some concepts in statistical inference
and start practicing Stata using Stata menus. Consider Problem C.7 in Appendix C of
Wooldridge (2013, page 793) and the ensuing comparison wage data set. Use the Stata data
set wageba_appc7.dta (posted below) and Stata menus to answer the following questions
as appropriate.
To start, double-click on wageba_appc7.dta file. This should launch Stata and the wage
data should be loaded into Stata.

A.

Describe the data set in memory.

1
This assignment can be done in groups of two students. If you do so, you only need to identify the members of
the group and submit one common solution.

B.

Provide summary Statistics for all variables.

C.

Use Stata menu system to answer problem C.7 part (i) in the textbook.

D.

Answer problem C.7 part (ii) in the textbook.

E.

Use Stata menu to answer problem C.7 part (iii) in the textbook.

F.

Use the output from part (E) above to answer problem C.7 part (iv). What does this p-value
tell you?

Stata hints for problem #4 :

A.

Choose the menus submenus as follows: Data > Describe data > Describe data in memory.
Should see the results in the results window.

B.

Choose Statistics > summaries, tables and tests > Summary and descriptive statistics >
Summary statistics. Should see the standard display: #obs, mean, St. Dev., min, and max
for each variable in memory.

C.

Choose Statistics > summaries, tables and tests > Summary and descriptive statistics >
Confidence intervals for means . Then enter the variable name in the box. The the confidence
interval results are shown in the output (results) window.

E.

Choose Statistics > summaries, tables and tests > Classical tests of hypothesis > One-sample
mean-comparison test. Then enter the variable name and Hypothesized mean in the boxes.
The test results are shown in the output (results) window. As usual, you will need to provide
the conclusion of the test for each level of significance.

F.

Note that Stata displays p-values for two-tailed and one-sided tests. You choose the one
that is applicable in this case.

Please attach printout of the results for #4 parts A, B, C and E.