ECONOMETRICS(CIC2005)

Tutorial 5 & 6
February 21, 2018

Problem 1.

Using the data in GPA2 on 4,137 college students, the following equation was estimated
by OLS:
\ = 1.392 − 0.0135 hsperc + 0.00148 sat
colgpa
n = 4, 137, R2 = 0.273

where colgpa is measured on a four-point scale, hsperc is the percentile in the high school
graduating class (defined so that, for example, hsperc = 5 means the top 5% of the class),
and sat is the combined math and verbal scores on the student achievement test.
a) What does it make sense for the coefficient on hsperc to be negative?

b) What is the predicted college GPA when hsperc = 20 and sat = 1, 050?

c) Suppose that two high school graduates, A and B, graduated in the same percentile
from high school, but Student A’s SAT score was 140 points higher (about one standard
deviation in the sample). What is the predicted difference in college GPA for these
two students? Is the difference large?

d) Holding hsperc fixed, what difference in SAT scores leads to predicted colgpa difference
of 0.50, or one-half of a grade point? Comment on your answer.

Problem 2.

The data in WAGE2 on working men was used to estimate the following equation:
d = 10.36 − 0.094 sibs + 0.131 meduc + 0.210 f educ
educ
n = 722, R2 = 0.214

where educ is years of schooling, sibs is number of siblings, meduc is mother’s years of
schooling, and f educ is father’s years of schooling.
a) Does sibs have the expected effect? Explain. Holding meduc and f educ fixed, by how
much does sibs have to increase to reduce predicted years of education by one year?
(A noninteger answer is acceptable here.)

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 b) Discuss the interpretation of the coefficient on meduc.

c) Suppose that Man A has no siblings, and his mother and father each have 12 years of
education. Man B has no siblings, and his mother and father each have 16 years of
education. What is the predicted difference in years of education between B and A?

Problem 3.

The following model is a simplified version of the multiple regression model used by Biddle
and Hamermesh (1990) to study the trade-off between time spent sleeping and working and
to look at other factors affecting sleep:

sleep = β0 + β1 totwrk + β2 educ + β3 age + u

where sleep and totwrk (total work) are measured in minutes per week and educ and age
are measured in years.

a) If adults trade off sleep for work, what is the sign of β1 ?

b) What sign do you think β2 and β3 will have?

c) Using the data SLEEP75, the estimated equation is

[ = 3, 638.25 − 0.148 totwrk − 11.13 educ − 2.20 age

sleep
n = 706, R2 = 0.113

If someone works five more hours per week, by how many minutes is sleep predicted
to fall? Is this a large trade-off?

d) Discuss the sign and magnitude of the estimated coefficient on educ.

e) Would you say totwork, educ, and age explain much of the variation in sleep? What
other factors might affect the time spent sleeping? Are these likely to be correlated
with totwork?

Problem 4.

In study relating college grade point average to time spent in various activities, you dis-
tribute a survey to several students. The students are asked how many hours they spend
each week in four activities: studying, sleeping, working, and leisure. Any activity is put into
one of the four categories, so that for each students, the sum of hours in the four activities
must be 168.

a) In the model

GP A = β0 + β1 study + β2 sleep + β3 work + β4 leisure + u

does it make sense to hold sleep, work, and leisure fixed, while changing study?

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 b) Explain why this model violates assumption ”No Perfect Collinearity”?
c) How could you reformulate the model so that its parameters have useful interpretation
and it satisfies the above assumption in b)?
Problem 5.

Consider the multiple regression model containing three independent variables, under 4 as-
sumptions of multiple linear regression:
y = β0 + β1 x1 + β2 x2 + β3 x3 + u
You are interested in estimating the sum parameters on x1 and x2 ; call this θ1 = β0 + β1
a) Show that θ̂1 = β̂1 + β̂2 is unbiased estimator of θ1
b) Find V ar(θ̂1 ) in terms of V ar(β̂1 ), V ar(θ̂2 ), and Corr(β̂1 , β̂2 ).
Problem 6.

Which of the following can cause OLS estimators to be biased?

a) Heteroskedasticity.
b) Omitting an important variable.
c) A sample correlation coefficient of 0.95 between two independent variables both in-
cluded in the model.
Problem 7.

The following equation describes the median housing price in a community in terms of
amount of pollution (nox for nitrous oxide) and the average number of rooms in houses in
the community (rooms):
log(price) = β0 + β1 log(nox) + β2 rooms + u
a) What are the probable signs of β1 and β2 ? What is the interpretation of β1 ? Explain.
b) Why might log(nox) and rooms be negatively correlated? If this is the case, does the
simple regression of log(price) and log(nox) produce an upward or a downward biased
estimator of β1 ?
c) Using the data HPRICE2, the following equations were estimated:
\ = 11.71 − 1.043 log(nox),
log(price) n = 506, R2 = 0.264
\ = 9.23 − 0.718 log(nox) + 0.306 rooms,
log(price) n = 506, R2 = 0.514
Is the relationship between the simple and multiple regression estimates of the elasticity
of price with respect to nox what you would have predicted, given your answer in part
b)? Does this mean that -0.718 is definitely closer to the true elasticity then -1.043?

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Problem 8.

Suppose that you are interested in estimating the ceteris paribus relationship between y
and x1 . For this purpose, you can collect data on two control variables, x2 and x3 . (For
concreteness, you might think of y as final exam score, x1 as class attendance, x2 as GPA
up through the previous semester, and x3 as SAT or ACT score.) Let β̃1 be the simple
regression estimate from y on x1 and let β̂1 be the multiple regression estimate from y on
x1 , x2 , x3 .
a) If x1 is highly correlated with x2 and x3 have large partial effects on y, would you
expect β̃1 and β̂1 to be similar or very different? Explain.
b) If x1 is almost uncorrelated with x2 and x3 , but x2 and x3 are highly correlated, will
β̃1 and β̂1 tend to be similar or very different? Explain.
c) If x1 is highly correlated with x2 and x3 , and x2 and x3 have small partial effects on
y, would you expect se(β̃1 ) or se(β̂1 ) to be smaller? Explain.
d) If x1 is uncorrelated with x2 and x3 , x2 and x3 have large partial effects on y, and x2
and x3 are highly correlated, would you expect se(β̃1 ) or se(β̂1 ) to be smaller? Explain.
Problem 9.

Suppose that the population model determining y is

y = β0 + β1 x1 + β2 x2 + β3 x3 + u
and this model satisfies multiple linear regression assumption. However, we estimate the
model that omits x3 . Let β̃0 , β̃1 and β̃2 be the OLS estimators from the regression of y on
x1 and x2 . Show that the expected value of β̃1 (given the values of the independent variable
in the sample) is Pn
i=1 r̂i1 xi3
E(β̃1 ) = β1 + β3 P n 2
i=1 r̂i1
where the r̂i1 are the OLS residuals
P from the  regression ofx1 on x2 . [Hint: The formula for
β̃1 comes from equation β̂1 =  i=1 r̂i1 yi / ni=1 r̂i1
n 2
P
yi . Plug yi = β0 + β1 xi1 + β2 xi2 +
β3 xi3 + ui into this equation. After some algebra, take the expectation treating xi3 and r̂i1
as nonrandom.]
Problem 10.

a) Consider the simple regression model y = β0 +β1 x+u under the first four Gauss-Markov
assumptions. For some function g(x), for example g(x) = x2 or g(x) = log(1 + x2 ),
define zi = g(xi ). Define a slope estimator as
Pn
(zi − z̄)yi
β̃1 = Pni=1
i=1 (zi − z̄)xi

Show that β̃1 is linear unbiased. Remember, because E(u|x) = 0, you can treat both
xi and zi as nonrandom in your derivation.

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b) Add the homoskedasticity assumption, show that
Pn
2 (zi − z̄)2
V ar(β̃1 ) = σ P i=1 2
 n (zi − z̄)xi 
i=1