JIANGSU UNIVERSITY

ECONOMETRICS

ASSIGNMENT NO. 2

Name: Saif Ullah

ID: 5103181211
Major: PhD Management Sciences & Engineering
School of Finance & Economics
QUESTION NO. 1

By using the following equation “Y = a + bx + u”, Prove and Compute

How much is “a” and “b”.

SOLUTION:

𝑌 = 𝛼 + 𝛽𝑥 + 𝜇

Then,

𝜇 = 𝑌 − 𝛼 − 𝛽𝑥

Let, 𝜃 = (𝜇)2 , then

𝜃 2 = (𝑌 − 𝛼 − 𝛽𝑥)2 = 𝑌 2 + 𝛼 2 + 𝛽 2 𝑥 2 − 2𝑦𝑥 + 2𝛼𝛽𝑥 − 2𝑦𝛽𝑥

Taking first order differentiation Taking first order differentiation with

with respect to α, respect to β,
𝑑𝜃 𝑑𝜃
= 2𝛼 − 2𝑌 + 2𝛽𝑥 = 2𝛽𝑥 2 − 2𝑦𝑥 + 2𝛼𝑥
𝑑𝛼 𝑑𝛽
By taking “-2” common from the above By taking “-2x” common from the above
equation equation
𝑑𝜃 𝑑𝜃
= −2(𝑌 − 𝛼 − 𝛽𝑥) = 0 = 2𝑥(𝑦 − 𝛽𝑥 − 𝛼) = 0
𝑑𝛼 𝑑𝛽

∑(𝑌 − 𝛼 − 𝛽𝑥) = 0 ∑ 𝑥(𝑦 − 𝛽𝑥 − 𝛼) = 0

∑ 𝑌 − ∑ 𝛼 − ∑ 𝛽𝑥 = 0 ∑ 𝑥𝑌 − ∑ 𝛼𝑥 − ∑ 𝛽𝑥 2 = 0

∑ 𝑌 = ∑ 𝛼 + ∑ 𝛽𝑥

Equation 1
∑ 𝑌 = 𝑛 𝛼 + ∑ 𝛽𝑥

∑ 𝑥𝑌 = 𝛼 ∑ 𝑥 + 𝛽 ∑ 𝑥 2

𝑛 𝛼 = ∑𝑌 − 𝛽∑𝑥
∑𝑌 − 𝛽∑𝑥
𝛼=
𝑛
Equation 2

𝛼 = 𝑌̅ − 𝛽𝑥̅

By putting value of α in equation 1,

∑ 𝑥𝑌 = (𝑌̅ − 𝛽𝑥̅ ) ∑ 𝑥 + 𝛽 ∑ 𝑥 2
 ∑ 𝑥𝑌 = 𝑌̅ ∑ 𝑥 − 𝛽𝑥̅ ∑ 𝑥 + 𝛽 ∑ 𝑥 2

∑ 𝑥𝑌 = 𝑌̅ ∑ 𝑥 + 𝛽 (𝑥̅ ∑ 𝑥 − ∑ 𝑥 2 )

𝛽 (∑ 𝑥 2 − 𝑥̅ ∑ 𝑥) = ∑ 𝑥𝑌 − 𝑌̅ ∑ 𝑥

∑ 𝑥𝑌 − 𝑌̅ ∑ 𝑥
𝛽=
(∑ 𝑥 2 − 𝑥̅ ∑ 𝑥)

∑ 𝑥𝑌 − 𝑛𝑌̅𝑥̅
𝛽=
(∑ 𝑥 2 − 𝑛𝑥̅ 2 )

𝛼 = 𝑌̅ − 𝛽𝑥̅

QUESTION NO. 2

Let z=3x3+x2y2-4y3
▪ Please compute the first order, second order and third order partial
differentiation of x.
▪ Please compute the first order, second order and third order partial
differentiation of y.

SOLUTION:

Differentiation with respect to x

𝑍 = 3𝑥 3 + 𝑥 2 𝑦 2 − 4𝑦 3

Taking first order differentiation with respect to x,

𝑑𝑧
= 9𝑥 2 + 2𝑥𝑦 2
𝑑𝑥

Taking second order differentiation with respect to y,

𝑑𝑍
= 18𝑥 + 2𝑦 2
𝑑𝑥

Differentiation with respect to y

𝑍 = 3𝑥 3 + 𝑥 2 𝑦 2 − 4𝑦 3
Taking first order differentiation with respect to y,

𝑑𝑧
= 2𝑦𝑥 2 − 12𝑦 2
𝑑𝑦

Taking second order differentiation with respect to y,

𝑑𝑧
= 2𝑥 2 − 24𝑦
𝑑𝑦

QUESTION NO. 3

What is TSS, ESS, RSS, please use figure and formula to depict, what is the
relationship for them?

SOLUTION:

Total Sum of Squares (TSS): It is defined as the sum of the all observations, of the squared
differences of each observation from the overall mean.

Explained Sum of Squares (ESS): The ESS tells you how much of the variation in the
dependent variable your model explained.

Residual Sum of Squares (RSS): The residual sum of squares tells you how much of the
dependent variable’s variation your model did not explained.
QUESTION NO. 4
What is R-squared?

SOLUTION:

R-Squared tells us the proportion of variation in the dependent variable that has been
explained by this model.

QUESTION NO. 5

5.2. reg lngrp lninvention (please write the null and alternative hypothesis,
and judge whether lninvention is significant or not according to p and t
value, what is the economic meaning of the influencing coefficient of
lninvention, what is the economic meaning of R-squared)

SOLUTION:

Null Hypothesis (𝐻0 ): There is no relationship between lninvention and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): Lninvention has an effect on lngrp (𝛽 ≠ 0)

The value of R Square is 0.797, that shows that almost 80% variation in lngrp is explained
by the model. The value of the coefficient of lninvention is 0.7543, that shows that with the
1-unit change in lninvention, the value of lngrp will increase by 0.7543. The value of T
statistics is 45.10 >1.96 (P value < 0.05), shows that the relationship between lninvention
and lngrp is statistically significant. So, we will reject our null hypothesis that there is no
impact of lninvention on lngrp.

5.3. reg lngrp lninvention lnutility (please write the null and alternative
hypothesis, and judge whether lninvention, lnutility is significant or not
according to p and t value, what is the economic meaning of the
influencing coefficient of lninvention, lnutility, what is the economic
meaning of R-squared)

SOLUTION:

For Lninvention and Lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lninvention and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): Lninvention has an effect on lngrp (𝛽 ≠ 0)

For Lnutility and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lnutility and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lnutility has an effect on lngrp (𝛽 ≠ 0)

The value of R Square is 0.8964, that shows that almost 90% variation in lngrp is explained
by the model. The value of the coefficient of lninvention is 0.1768, that shows that with the
1-unit change in lninvention, the value of lngrp will increase by 0.1768. The value of T
statistics is 8.81 >1.96 (P value < 0.05), shows that the relationship between lninvention and
lngrp is statistically significant. So, we will reject our null hypothesis that there is no impact
of lninvention on lngrp. The value of the coefficient of lnutility is 0.504, that shows that
with the 1-unit change in lnutility, the value of lngrp will increase by 0.504. The value of T
statistics is 22.25 >1.96 (P value < 0.05), shows that the relationship between lnutility and
lngrp is statistically significant. So, we will reject our null hypothesis that there is no impact
of lnutility on lngrp.

5.4. reg lngrp lninvention lnutility lndesign (please write the null and
alternative hypothesis, and judge whether lninvention lnutility lndesign
is significant or not according to p and t value, what is the economic
meaning of the influencing coefficient of lninvention, lnutility lndesign,
what is the economic meaning of R-squared)

SOLUTION:

For Lninvention and Lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lninvention and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): Lninvention has an effect on lngrp (𝛽 ≠ 0)

For Lnutility and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lnutility and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lnutility has an effect on lngrp (𝛽 ≠ 0)

For Lndesign and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lndesign and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lndesign has an effect on lngrp (𝛽 ≠ 0)

The value of R Square is 0.9101, that shows that almost 91% variation in lngrp is explained
by the model. The value of the coefficient of lninvention is 0.1414, that shows that with the
1-unit change in lninvention, the value of lngrp will increase by 0.1414. The value of T
statistics is 7.4 >1.96 (P value < 0.05), shows that the relationship between lninvention and
lngrp is statistically significant. So, we will reject our null hypothesis that there is no impact
of lninvention on lngrp. The value of the coefficient of lnutility is 0.3716, that shows that
with the 1-unit change in lnutility, the value of lngrp will increase by 0.3716. The value of
T statistics is 14.4 >1.96 (P value < 0.05), shows that the relationship between lnutility and
lngrp is statistically significant. So, we will reject our null hypothesis that there is no impact
of lnutility on lngrp. The value of the coefficient of lndesign is 0.1741, that shows that with
the 1-unit change in lndesign, the value of lngrp will increase by 0. 1741. The value of T
statistics is 8.9 >1.96 (P value < 0.05), shows that the relationship between lndesign and
lngrp is statistically significant. So, we will reject our null hypothesis that there is no impact
of lndesign on lngrp.

5.5. According to R-squared, to decide which model has the highest

explaining power?

SOLUTION:

Model (IV) R Square

lninvention 0.797
lninvention lnutility 0.8964
lninvention lnutility lndesign 0.9101

The above table shows that when there was only 1 explanatory variable, the Value of R-
Square was 0.797 and it gradually increased when we include more variables. It reaches to
0.9101 when we added three explanatory variables. On the basis of R-Square only, we can
say that 3rd model was having highest explanatory power as the value or R – Square was
highest here.

5.6. reg lngrp lninvention lnutility lndesign if year before 2000 (please write
the null and alternative hypothesis, and judge whether lninvention
lnutility lndesign is significant or not according to p and t value, what is
the economic meaning of the influencing coefficient of lninvention,
lnutility lndesign, what is the economic meaning of R-squared)

SOLUTION:

For Lninvention and Lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lninvention and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): Lninvention has an effect on lngrp (𝛽 ≠ 0)

For Lnutility and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lnutility and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lnutility has an effect on lngrp (𝛽 ≠ 0)

For Lndesign and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lndesign and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lndesign has an effect on lngrp (𝛽 ≠ 0)

The value of R Square is 0.8891, that shows that almost 89% variation in lngrp is explained
by the model. The value of the coefficient of lninvention is 0.1171, that shows that with the
1-unit change in lninvention, the value of lngrp will change by 0.1171. The sign of the
coefficient is negative, so there is inverse relationship between lninvention and lngrp. The
value of T statistics is 2.24 >1.96 (P value < 0.05), shows that the relationship between
lninvention and lngrp is statistically significant. So, we will reject our null hypothesis that
there is no impact of lninvention on lngrp. The value of the coefficient of lnutility is 0.5015,
that shows that with the 1-unit change in lnutility, the value of lngrp will increase by 0.5015.
The value of T statistics is 9.42 >1.96 (P value < 0.05), shows that the relationship between
lnutility and lngrp is statistically significant. So, we will reject our null hypothesis that there
is no impact of lnutility on lngrp. The value of the coefficient of lndesign is 0.2919, that
shows that with the 1-unit change in lndesign, the value of lngrp will increase by 0. 2919.
The value of T statistics is 10.3 >1.96 (P value < 0.05), shows that the relationship between
lndesign and lngrp is statistically significant. So, we will reject our null hypothesis that there
is no impact of lndesign on lngrp.

5.7. reg lngrp lninvention lnutility lndesign if year after 2000 (please write
the null and alternative hypothesis, and judge whether lninvention
lnutility lndesign is significant or not according to p and t value, what is
the economic meaning of the influencing coefficient of lninvention,
lnutility lndesign, what is the economic meaning of R-squared)

SOLUTION:

For Lninvention and Lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lninvention and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): Lninvention has an effect on lngrp (𝛽 ≠ 0)

For Lnutility and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lnutility and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lnutility has an effect on lngrp (𝛽 ≠ 0)

For Lndesign and lngrp

Null Hypothesis (𝐻0 ): There is no relationship between lndesign and lngrp (β = 0)

Alternative Hypothesis (𝐻1 ): lndesign has an effect on lngrp (𝛽 ≠ 0)

The value of R Square is 0.8987, that shows that almost 89% variation in lngrp is explained
by the model. The value of the coefficient of lninvention is 0.1023, that shows that with the
1-unit change in lninvention, the value of lngrp will change by 0.1023. The sign of the
coefficient is negative, so there is inverse relationship between lninvention and lngrp. The
value of T statistics is 2.71 >1.96 (P value < 0.05), shows that the relationship between
lninvention and lngrp is statistically significant. So, we will reject our null hypothesis that
there is no impact of lninvention on lngrp.

The value of the coefficient of lnutility is 0.4953, that shows that with the 1-unit change in
lnutility, the value of lngrp will increase by 0.4953. The value of T statistics is 12.11 >1.96
(P value < 0.05), shows that the relationship between lnutility and lngrp is statistically
significant. So, we will reject our null hypothesis that there is no impact of lnutility on lngrp.
The value of the coefficient of lndesign is 0.2869, that shows that with the 1-unit change in
lndesign, the value of lngrp will increase by 0. 2869. The value of T statistics is 11.06 >1.96
(P value < 0.05), shows that the relationship between lndesign and lngrp is statistically
significant. So, we will reject our null hypothesis that there is no impact of lndesign on
lngrp.

5.8. According to R-squared, to decide which model has the highest

explaining power?

SOLUTION:

Model R Sqare
< 2000 0.8891
<= 2000 0.8987

If we look at the values of R Square of both models, there is not a very huge difference
between both values. But model that includes the value of 2000 and after has more better
explanatory power as compared to other model.