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ECO 303 ASSIGNMENT 1 ANSWERS

1.

2. (a) The estimated relationship is given by The negative sign for b2 is as expected. That is, we expect an increase in the unemployment rate to lead to a decline in the help-wanted index. The estimated value b2 suggests that a oneunit change in the unemployment rate will lead to a drop in the help-wanted index of 46.4. (b) (i) If structural unemployment existed over the last two years, but not over the first four years, then the relationship between HWI and U may have changed. The conjecture asks us to investigate whether an equation based on the first four years underpredicts HWI for the remaining two years. If the last eight observations on HWI are unusually large, including them in the estimation will move the estimated equation towards those points, masking the impact of the structural unemployment. (ii) The estimates have changed very little, suggesting that the relationship did not change over the last two years.

(iii) The actual and predicted values for HWIt , along with the difference appear in the table below. Note that HWI is not consistently higher than its predicted value. The difference is positive for only 4 out of the 8 cases, and the magnitudes of the negative differences are much greater than those for the positive differences. Thus, the data do not support the conjecture about structural unemployment.

3. (a) The estimated relationship between salary and years of education is given by We expect the coefficient of Xt to have a positive sign because more years of education should lead to a higher starting salary. Thus, b2 = 128.09 has the expected sign. If the intercept is taken literally, it suggests an employee with no education would have a beginning salary of $3819. However, it is dangerous to utilize the equation for zero years of education when there are no sample observations in this vicinity. (b) The estimated equation predicts that an individual with 13 years of education would have a starting salary of $5484. 4. (a) The least-squares estimated demand equation is The predicted number of visits for a zero entry price is equal to b1 , in units of thousands. This prediction is 15,763 visits. (b) If price increases from $0 to $10, the estimated drop in the number of visits is b2 10 1000 = 2520.2

5.(a)

(b) The plot in the following figure suggests a positive relationship between house price and
size.

(c) The estimated equation is


price = 426.71+ 46.005 sqft The coefficient 46.005 suggests house price increases by approximately $46 for each additional square foot of house size. The intercept, if taken literally, suggests a house with zero square feet would cost $426. The model should not be accepted as a serious one in the region of zero square feet, a meaningless value. (d) There appears to be a slight tendency for the magnitude of the residuals to increase for largersized houses.

(e) The predicted price of a house with 2000 square feet of living space is pricef = 426.71+ 46.005 2000 = 91,583

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