TITLE OF THE ASSIGNMENT

Econometrics

Credit Assignment
Submitted by Hafeez ur rehman(03)

Credit Assignment for basic econometrics

Presented to
Sir Ashraf Ali khan

SBBU School of Business

SHAHEED BENAZIR BHUTTO UNIVERSITY, SBA
Date of Submission
24-05-2018
1.5. Suppose you were to develop an economic model of criminal activities, say, the
hours spent in criminal activities (e.g., selling illegal drugs). What variables would you
consider in developing such a model? See if your model matches the one developed by
the Nobel laureate economist Gary Becker.

Ans Some of the relevant variables would include: (1) wages or earnings in criminal activity,
(2) hourly wages or earnings in non-criminal activity, (3) probability of getting caught, (4)
probability of conviction, (5) expected sentence after conviction. Note that it may not be easy
to get data on earnings in the illegal activities. Anyway, refer to the Becker article cited in the
text.

1.6. Controlled experiments in economics: On April 7, 2000, President Clinton signed

into law a bill passed by both Houses of the U.S. Congress that lifted earnings
limitations on Social Security recipients. Until then, recipients between the ages of 65
and 69 who earned more than $17,000 a year would lose 1 dollar’s worth of Social
Security benefit for every 3 dollars of income earned in excess of $17,000. How would
you devise a study to assess the impact of this change in the law? Note: There was no
income limitation for recipients over the age of 70 under the old law

Ans One key factor in the analysis would be the labor force participation rate of people in the
65-69 age category. Data on labor force participation are collected by the Labor Department.
If, after the new law went into effect, we find increased participation of these ssenior citizens
in the labor force that would be strong indicator that the earlier law had artificially restricted
their labour market participation. It would be interesting to find out what kind of jobs those
workers get and what they earn.

1.7. The data presented in Table 1.5 was published in the March 1, 1984 issue of the
Wall Street Journal. It relates to the advertising budget (in millions of dollars) of 21
firms for 1983 and millions of impressions retained per week by the viewers of the
products of these firms. The data are based on a survey of 4000 adults in which users of
the products were asked to cite a commercial they had seen for the product category in
the past week.

a. Plot impressions on the vertical axis and advertising expenditure on the horizontal
axis.

b. What can you say about the nature of the relationship between the two variables?

c. Looking at your graph, do you think it pays to advertise? Think about all those
commercials shown on Super Bowl Sunday or during the World Series.

Ans (a) (b)(c) as the following figures shows that there seems to be a positive relationship
between the two variables although it does not seems to be vary strong. This probably
suggests that it pays to advertise otherwise it is bad news for the advertising industry
2.1. What is the conditional expectation function or the population regression function?
Ans It tells how the mean or average response of the sub-populations of Y varies with the
fixed values of the explanatory variable (s).

2.2. What is the difference between the population and sample regression functions? Is
this a distinction without difference?

Ans The distinction between the sample regression function and the population regression
function is important, for the former is is an estimator of the latter; in most situations we have
a sample of observations from a given population and we try to learn something about the
population from the given sample.

2.3. What is the role of the stochastic error term ui in regression analysis? What is the
difference between the stochastic error term and the residual, ˆ ui?

Ans A regression model can never be a completely accurate description of reality. Therefore,
there is bound to be some difference between the actual values of the regressand and its
values regressand and its values estimated from the chosen model. This difference is simply
the stochastic error term,. The residual is the sample counterpart of the stochastic error term.

2.4. Why do we need regression analysis? Why not simply use the mean value of the
regress and as its best value?

Ans Although we can certainly use the mean value, standard deviation and other summary
measures to describe the behaviour the of the regress and, we are often interested in finding
out if there are any causal forces that affect the regress and. If so, we will be able to better
predict the mean value of the regress and. Also, remember that econometric models are often
developed to test one or more economic theories.

2.5. What do we mean by a linear regression model?

Ans A model that is linear in the parameters; it may or may not be linear in the variables.

2.6. Determine whether the following model are linear in the parameters, or the
variables, or both. Which of the remodels’ are linear regression models?

Ans Models (a), (b), (c) and (e) are linear (in the parameter) regression models. If we let a =
In /? i, then model (d) is also linear.