Trần Phương Quỳnh 31161023418

HOMEWORK – SESSION 3
Question 1:

i. R squared indicates the Goodness-of-Fit of the estimate. Example: The regression

explains only 1.3% of the total variation in salaries.
ii.
 Assumption MLR.1 (Linear in Parameters)
 Assumption MLR.2 (Random Sampling)
 Assumption MLR.3 (No Perfect Collinearity)
 Assumption MLR.4 (Zero Conditional Mean)
 Assumption MLR.5 (Homoskedasticity)
iii. Adding a new indepentdent variable to a regression can exacerbate the multicollinearity
problem.
 Example: Estimating the effect of various school expenditure categories on
student performance. It is likely that expenditures on teacher salaries, instructional
materials, athletics, and so on are highly correlated: wealthier schools tend to
spend more on everything, and poorer schools spend less on everything
Difficult to estimate the effect of any particular expenditure category on student
performance when there is little variation in one category that cannot largely be
explained by variations in the other expenditure categories (this leads to high 𝑅𝑗2
for each of the expenditure variables)
iv. A model is misspecified when it violates the assumptions underlying linear regression, its
functional form is incorrect, or it contains time-series specification problems.

Question 2:

i.
 ̂ = 119.57 ounces.
When cigs=0  𝑏𝑤𝑔ℎ𝑡
 ̂ = 119.57 − 0.524 ∗ 20 = 109.09 ounces.
When cigs=20  𝑏𝑤𝑔ℎ𝑡
 When the average number of cigarettes the mother smoked per day during
pregnancy (cigs) increases, the predicted birth weight decreases.
ii. When the average number of cigarettes the mother smoked per day during pregnancy
(cigs) increases by one cigarette, the predicted birth weight is estimated to be decrease by
0.524 ounces. This negative relationship does make sense.
iii. When a birth weight is 125 ounces, the number of smoked cigs is estimated to be -10.36.
This doesn’t make sense because the number of smoked cigs cannot smaller than 0.
iv. The intercept becomes 119.77 ∗ 0.028 = 3.35 and the slope becomes -0.514 ∗ 0.028 ∗
20 = −0.29.
Question 2:
. sum wage IQ

Variable Obs Mean Std. Dev. Min Max

wage 935 957.9455 404.3608 115 3078

i. IQ 935 101.2824 15.05264 50 145
 Average salary = $957.9455
 Average IQ = 101.2824
 Standard deviation of IQ = 15.05
ii.
 ̂ = 116.99 + 8.30𝐼𝑄. 𝑛 = 935, 𝑅 2 =
This calls for a level-level model: 𝑤𝑎𝑔𝑒
0.096
. reg wage

Source SS df MS Number of obs = 935

F(0, 934) = 0.00
Model 0 0 . Prob > F = .
Residual 152716168 934 163507.675 R-squared = 0.0000
Adj R-squared = 0.0000
Total 152716168 934 163507.675 Root MSE = 404.36

wage Coef. Std. Err. t P>|t| [95% Conf. Interval]

_cons 957.9455 13.22401 72.44 0.000 931.9932 983.8977


 An increase in IQ of 15 increases predicted monthly salary by 8.30 × 15 =
$124.50 (in 1980 dollars).
 𝑅 2 of this regression suggests that IQ scores explains 9.6% of the variation in
wage, which is not much
iii.
 ̂ ) = 5.89 + 0.0088𝐼𝑄. 𝑛 = 935,
This calls for a log-level model: 𝑙𝑜𝑔(𝑤𝑎𝑔𝑒
2
𝑅 = 0.099
 If ∆𝐼𝑄 = 15, then ∆𝑙𝑜𝑔(𝑤𝑎𝑔𝑒) = 0.0088 × 15 = 0.132, which is the
approximate proportionate change in predicted wage. That is, wage increases by
approximately 13.2%