a.

Using Stata 11, we obtained the regression result: = 1904.557 93.75259 + 0.0002254 + 0.1572073 + 0.0155724 + 37.32565 + 0.2149663 0.3486302

+ 20.72802

Based on theory, the goodness of fit from regression model is shown by: 1. F-Stat or Probability of F-value; 2. R-square ( ); 3. Adjusted R-square ( . ). According to the result, Probability of F-value is 0,000 which means the regression model is statistically significant. Then the value is 0,8256 which means 82,56% the actual model can be explained by the regression model. Even the model is statistically significant, but the partial test shows conversely. Only constant, explanatory variable such as Rate (with the significance level : 90%) and ERNO (significance level : 95%) are statistically significant. b. There are some options to identify the evidence of multicollinearity: 1. F-stat model is statistically significant, value is high, but many explanatory variables (ERSP, NEIN, Assets, Age, DEP, and School) are statistically insignificant; 2. High pair-wise correlations among regressors with using correlation matrix. Based on Pearson Correlation assumption, high multicollinearity will be existed if the coefficient correlation is above 0,8; Rate 1.000000 0.571693 0.058992 0.701787 0.778932 0.044173 -0.60136 0.881271 ERSP 1.000000 -0.04099 0.234426 0.274094 -0.0153 -0.69288 0.549108 ERNO NEIN Assets Age DEP School

Rate ERSP ERNO NEIN Assets Age DEP School

1.000000 0.359094 0.292243 0.775494 0.050212 -0.29856

1.000000 0.987510 0.502432 -0.52083 0.539173

1.000000 0.417086 -0.51355 0.630899

1.000000 -0.04836 -0.33107

1.000000 -0.60258

1.000000

3. Auxiliary regressions. Adopting Kliens rule of thumb which suggest that multicollinearity may be a troublesome problem only if the obtained from an auxiliary regression is greater than the overall .

Variables Rate ERSP ERNO NEIN Assets Age DEP School

R2 0.9415 0.7142 0.6813 0.9945 0.9948 0.8971 0.779 0.9606

F-stat 75.0509 11.6594 9.9771 837.6919 893.9790 40.6985 16.4502 113.8759

c. To clarify the issue of multicollinearity, we can use the auxiliary regressions. In this method, values obtained from these regressions: Variables Rate ERSP ERNO NEIN Assets Age DEP School R2 0.9415 0.7142 0.6813 0.9945 0.9948 0.8971 0.779 0.9606 VIF 17.09402 3.49895 3.137747 181.8182 192.3077 9.718173 4.524887 25.38071 TOL 0.0585 0.2858 0.3187 0.0055 0.0052 0.1029 0.221 0.0394

From the table, we can realize the existence of multicollinearity from the Variance Inflation Factor (VIF). As a rule of Thumb (Gujarati), if the VIF of the variable exceeds 10, which will happen if R the variable exceeds 0.90, that variable is said be highly collinear. The same information to identify multicollinearity is from Tolerance factors (TOL). The closer the tolerance factor is to 0, the greater is the evidence of collinearity. d. Now, that we have established that we have the multicollinearity problem, we have two choices to remedial measures: 1. Do nothing, because multicollinearity is essentially a data deficiency problem; 2. Follow some rule of thumb. Blanchard, the proponent of do nothing school of thought, expresses that multicollienarity is essentially a data deficiency problem and sometimes we have no choice over the data we have available for empiricalan analysis. In this case study, we will remedy the regression model with dropping some of variables that multicollinearity suspected. The variables that dropped from the model are NEIN and School because their correlation coefficient between two regressors (in excess of 0,8) and their VIF values are very high (exceeds 10).

. reg hours rate ersp erno assets dep age Source Model Residual Total hours rate ersp erno assets dep age _cons SS 112601.177 27165.5655 139766.743 Coef. -52.32641 .0180464 -.2493239 .0294037 15.93538 -4.572969 2296.577 df 6 28 34 MS 18766.8629 970.198768 4110.78655 t -1.90 0.51 -2.71 6.62 1.22 -1.95 20.90 P>|t| 0.068 0.611 0.011 0.000 0.232 0.061 0.000 Number of obs F( 6, 28) Prob > F R-squared Adj R-squared Root MSE = = = = = = 35 19.34 0.0000 0.8056 0.7640 31.148

Std. Err. 27.53297 .0350614 .0921377 .0044405 13.02946 2.342124 109.9065

[95% Conf. Interval] -108.7252 -.0537737 -.4380594 .0203078 -10.75426 -9.370594 2071.444 4.072325 .0898665 -.0605883 .0384996 42.62502 .2246547 2521.711

After 2 variables (NEIN and School) dropped from the model, we can get the new result with Probability of F-value is 0,000 which means the regression model is statistically significant. The value is 0,8056 which means 80,56% the actual model can be explained by the regression model. Then the partial test shows that Rate and Age are statistically significance with 10% while constant, ERNO, and Assets are statistically significance with 5%.

e.