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Misung Ahn
-0.160
(0.022)
lnY
1.692
(0.070)
Intercept
-9.899
(0.626)
N
R
27
0.981
F (2,24)
616.39
(b) Notice that the dependent variable and independent variables are transformed to the logratithm
function. Mathematically,
1 = log(Gt )/log(Pt )
and
2 = log(Gt )/log(Pt ).
Therefore,
mea-
sures the percentage change in the gas consumption with respect to the percentage change in the
gasoline price; that is, the price elasticity of gasoline. On the other hand,
change in the gas consumption with respect to the percentage change in income; that is, the income
elasticity of gasoline.
(c)
Ho : 1 = 0
vs
H1 : 1 > 0
t statistic =
Please
0.1604
0.1604 0
=
= 7.30 tdf =273=24
0.0220
SE(1 )
Since the critical value of the one-sided test at the 5% level for
which gives the
p value 0.000,
t24
we may reject the null hypothesis at the 5% level and conclude that
Ho : 2 = 1 vs H1 : 2 6= 1
t statistic =
1.6917 1
0.6917
=
= 9.839 tdf =273=24
0.0703
SE(2 )
This is the two-sided test which gives the critical value of 2.064 for
2.064,
tdf =24
at 5% level. Since
|9.839| >
we may reject the null hypothesis and conclude that the gasoline demand is not unitary income
elastic.
(e) From the following STATA results,
ln(Gt )
-0.143
(0.025)
lnY
1.205
(0.171)
PE
0.778
(2.462)
PElnP
1.081
(0.408)
PElnY
-0.101
(0.274)
Intercept
-5.440
(1.549)
N
R
27
0.991
F (5,21)
(f )
444.968
F T est
If the gasoline demand was unaected by the Arab Oil Embargo of 1973,
the dummy variable
P Et
3 = 4 = 5 = 0.
log(Gt ).
It is when
This is equivalent
(0 + 3 ) + (1 + 4 )log(Pt ) + (2 + 5 )log(Yt ) + Ut
= 0 + 1 log(Pt ) + 2 log(Yt ) + Vt
3 = 4 = 5 = 0,
(1)
(2)
Ho : 3 = 4 = 5 = 0 vs H1 : not H0
2
not Ho
for
i 3, 4, 5
are not zero but equal; all are not zero nor equal or etc. In order to conduct the
is not 0; or all
F test,
we consider
For the restricted model, we use Table 1. There are three restrictions(q
in class, this
= 3) in this test.
counts the number of equal signs but not the number of coecients in
As we learned
H0 .
Although the SSRs are not shown in Table 1 and 2, I used SSR from the STATA output.
test statistic =
SOLUTION 2 USING R :
2
test statistic =
2
)/3
(Ru2 RR
(0.9906 0.9809)/3
=
7.2234 F(3,21)
(1 Ru2 )/(27 6)
(1 0.9906)/21
F(3,21)
Vt ,
This is obtained by a STATA command predict resid, residuals following reg lnG lnP lnY in STATA.
Then we run the auxiliary regression of reg resid lnP lnY PE PElnP PElnY and get
0.5103 in this problem.
0.018
(0.025)
lnY
-0.487
(0.171)
PE
0.778
(2.462)
PElnP
1.081
(0.408)
PElnY
-0.101
(0.274)
Intercept
4.459
(1.549)
N
R
27
0.51
F (5,21)
4.378
Ru2 ,
which is
2df =3
3 = 4 = 5 = 0.
(h)
Before the embargo, the estimated price elasticity of demand is
as shown in equation (1). After the embargo, it is
1 = 0.1427
On the other hand, the estimated income elasticity of demand before the embargo is
2 = 1.2048
2 + 5 =
(2).
(i)
Notice that the price elasticity of gasoline demand used to be 0.9380, which is positive, surprisingly, and
then it is altered to -0.1427. To see if it is a statistically signicant change,
From STATA results corresponding to Table 2, we see that
Ho : 4 = 0 vs H1 : 4 6= 0.
t value = 2.65
Thus, we reject the null at the 5% level. Prior to the Embargo, the price elasticity used to be positive.
Considering that the price elasticity is mostly negative except for giens, one explanation to this
unintuitive results is the demand shifts.
Before the Embargo where the gasoline price was low and
stable, people could have aorded a large car, which demands more gasoline. Hence, the price elasticity
results in a positive number; that is, the gasoline demand increases with respect to the price increase.
After the Embargo, people would substitute their larger cars towards smaller cars and this will give
the usual negative price elasticity where higher gasoline price yields lower gasoline demand. Thus,
we can say that the demand became more sensitive to changes in price.
On the other hand, the income elasticity became higher in (h). It remains to be positive; the more
income one has, the more s/he demands the gasoline. Thus, the gasoline demand became more sensitive
to income. The analogous argument with car sizes goes through for the income elasticity.
(2) F-test
The unrestricted regression model:
Ho : 0 + c1 = 0
after imposing
0 = c1 .
is the number of equal signs in the hypothesis, we know there is only 1 restriction. Then, the relevant
F-distribution is
F(1,N 5) .
Ho : 2 = 3 = 4
(b)
after imposing
2 = 3 = 4 .
F(2,N 5) .
Ho : 1 + 2 + d3 + e4 = 1
1 = 1 2 d3 e4
Yn Xn1 =
F(1,N 5) .
p =the
(ii)
(iii)
q =the
r =the
Table 4:
0.2896
0.2120
Total
Source:
0.2423
Smoking.dta
(b) The estimated dierence in the probability of smoking between workers aected by ban and not is
Yn = 0 + 1 Xn + Un
where
Yn
Xn
is the dummy variable which is 1 if there is a work area smoking ban and 0 otherwise. To account for
the heteroskedasticity, we use the command robust and have the following STATA results.
To test the statistical signicance of the probability dierence, we test
t statistic =
Ho : 1 = 0
0.0776 0
= 8.6222 tdf =9998
0.0090
vs
H1 : 1 6= 0.
-0.078
(0.009)
Intercept
0.290
(0.007)
N
R
10000
0.008
F (1,9998)
75.061
With this large number of observations, t-distribution is well approximated to the normal distribution
so that p-value is 0.000. Hence, we may reject the null hypothesis that
1 = 0
smokern
smokern
The coecient on the smkban changes to -0.0472 from -0.0776. That is, the impact of smoking ban
policy at workplace, measured in absolute magnitude, on the probability of smoking decreases. Why
does it decrease? Mechanically, as there are more independent variables in the regression equation, it
is likely that an explanatory power of one variable decreases since newly added variables also explain
the dependent variable. Also, the model in (b) suers from omitted variable bias. That is,
smkban
may be correlated with the education/race/gender indicators or with age. For example, workers with
a college degree are more likely to work in an oce with a smoking ban than high-school dropouts,
and college graduates are less likely to smoke than high-school dropouts.
(d)
Ho : 1 = 0
vs
H1 : 1 6= 0
test statistic =
0.0472 0
= 5.2444 tdf =9989
0.0090
With this large number of observation, t-distribution is well approximated to the normal distribution
so that p-value is 0.000. Hence, we may reject the null hypothesis that
1 = 0
workplace smoking ban aects the probability of smoking. The 95% condence interval can be read
o of the STATA output in Figure 1 and is (-0.0648,-0.0297).
(e)
Ho : 5 = 6 = 7 = 8 = 0
vs
H1 : not Ho .
That
Notice that
Therefore, as the education level rises, we observe one exhibits lower probability of smoking.
(f ) The coecient on
age
age2
.05
Fitted values
.05
.1
.15
.2
20
40
60
80
age in years
Yn
(4)
().
smkban,
and so forth.
Variable
smkban
(0.029)
age
0.035
(0.007)
age2
0.000
(0.000)
hsdrop
1.142
(0.072)
hsgrad
0.883
(0.060)
colsome
0.677
(0.061)
colgrad
0.235
(0.065)
black
-0.084
(0.053)
hispanic
-0.338
(0.048)
Intercept
-1.735
(0.153)
10000
Log-likelihood
-5235.868
2(10)
(b)
Ho : 1 = 0
t statistic =
vs
(0.029)
female
602.597
H1 : 1 6= 0
0.15860
0.0290
Ho : 5 = 6 = 7 = 8 = 0
vs
H1 : not Ho
2df =4
at the 5% level is 9.488 < 496.7244 and thus we may reject the null and con-
clude that the education aects the probability of smoking. Notice that
4.
8
df = q = # of restrictions =
Just like Question 4 part (e), this yields the identical results of rejecting the null and
8 > 0.
Since the baseline education level is a Master's degree or higher, we observe one exhibits lower
Variable
smkban
(0.028)
age
0.014
(0.007)
age2
0.000
(0.000)
black
0.001
(0.052)
hispanic
-0.120
(0.045)
Intercept
-0.708
(0.134)
10000
Log-likelihood
-5484.230
2(6)
(d)
Ho : 3 = 4 = 0
vs
(0.028)
female
105.872
H1 : not Ho
2df =2
at the 5% level is 5.991<45.8178 and thus we may reject the null and
df = 2
here.
Variable
smkban
(0.029)
female
-0.114
(0.029)
hsdrop
1.093
(0.071)
hsgrad
0.863
(0.059)
colsome
0.669
(0.060)
colgrad
0.240
(0.065)
black
-0.078
(0.053)
hispanic
-0.313
(0.047)
Intercept
-1.157
(0.058)
10000
Log-likelihood
-5258.777
2(8)
556.779
(e) Fitted value in this probit model of Aloysius. To calculate the probabilities, take the estimation results from the probit model to calculate
at Yn , i.e.,
P rob(smoke) =
(Yn ).
0.090088
ban,
X A ,N o =[0
X A ,Y es =[1
0 20 400 1 0 0 0 0 0 1 ] and
XA,N o = 0.248718
Then,
XA,N o =
= 0.4641.
With the
= 0.4013.
The marginal eect of smoking ban for Aloysius is the lowering of the probability of smoking by
0.4641-0.4013=0.0628.
(f ) Fitted value of Brenda. Brenda's covariates without the ban is
so that
XB,N o = 1.0637963
0.1446.
XB,Y es
XB,N o =[0
1 40 1600 0 0 0 1 1 0 1]
= 0.1112.
The marginal eect of smoking ban for Aloysius is the lowering of the probability of smoking by
0.1446-0.1112=0.0334.
(g)
T = [0.04723990.03325690.00967440.00013180.32271420.23270120.16429680.0447983
XA,N o = 0.4494
P r(smokerA |Y es )
XA,Y es = 0.4021
The marginal eect of smoking ban for Aloysius from the LPM (linear probability model) is the lowering
of the probability of smoking by 0.4494-0.4021=0.0472.
P r(smokerB |N o )
XB,N o = 0.1460
P r(smokerB |Y es )
XB,Y es = 0.0987
The marginal eect of smoking ban for Brenda from the LPM is the lowering of the probability of
smoking by 0.1460-0.0987=0.0472.
(h) The probit and LPM results give similar predictions for the probabilities of both Aloysius and
Brenda. However, they yield dierent predictions of the eect of smoke ban on probability of smoking.
10
That is, the marginal eect of smoking ban for the probit model varies by the characteristics of an
individual here, the marginal eects of Aloysius and Brenda are dierent. On the other hand the
marginal eect of smoking ban for the LPM is identical for Aloysius and Brenda by the coecient of
smkban
variable. This makes us believe that the probit model is more convincing than the LPM.
Are the estimated eects large in an economic (i.e., real-world) sense? Most people might believe
the impacts are large. For example, in (e) the reduction on the probability is 6.3%. Applied to a large
number of people, this translates into a 6.3% reduction in the number of people smoking.
(i) Across groups, observe that the smoker ratio with the smoking ban is 0.2120 while that without the
ban is 0.2896. Thus, the average eect of a workplace smoking ban is 0.2896-0.2120=0.0776 around
8%.
Practically, this might not be signicant if the group characteristics seem to dier from each
other. Especially, the education level is quite varying between smokers and nonsmokers and thus, it
might not measure the average partial eect of the smoking ban policy well enough.
Table 9:
smkban
smoker female
0.2896
0.4923
38.0871
0.1258
0.3721
0.2717
0.1548
0.0746
0.2120
0.6094
39.0810
0.0690
0.2975
0.2857
0.2243
0.0784
0.1046
Total
0.2423
0.5637
38.6932
0.0912
0.3266
0.2802
0.1972
0.0769
0.1134
Source:
Smoking.dta
(j) What we did in part (i) corresponds to the option 2 of the last Friday lecture, i.e., quick and
dirty way of obtaining the average partial eect. It plugs in the average values of the variables into
the partial derivatives. However, as we saw in (i), it might be less appealing if we can not dene an
individual of average characteristics. An alternative method is the option 1; the average partial eect
is calculated by the sample average of the partial eects of all individuals. The quantities from option
1 and 2 are usually dierent as it is a nonlinear function. Specically, the option 1 measures
F (X)
]
E[
X2
E[F (X)|X]
"
#
N
X
F (Xn )
/N
X2n
n=1
"
N
X
#
(F (Xn |X1n = 1) F (Xn |X1n = 0)) /N
n=1
(k)
P r[Yn = 1|Xn ]
age
G(Xn )
Yn
= g(Xn )
|evaluated at Xn
age
age
= g(Xn ) [3 + 24 age] |evaluated at Xn
(5)
We want to evaluate this average eect of age by plugging the sample means for variables in the data
which is given below.
11
0.1271
Table 10:
stats
smkban female
mean
Source:
0.6098
0.5637
38.6932
0.0912
0.3266
0.2802
0.1972
0.0769
Smoking.dta
=
X
0.7247
= (0.7247) 1 (0.72) = 1 0.7642 = 0.2358
)
P rob(smoking|X
where
g()
is the pdf of Normal distribution. This is the average marginal eect of a one-unit change
age for X is positive at 0.0345 so that higher age increases the probability
age
age-specic marginal changes. This age-specic marginal eect dierence can give a completely wrong
estimates for the change in smoking probability induced by a work-place smoking ban.
(m)
Plugging the sample means of Table 11 into
12
0.1134
age
18
0.49
0.48
0.31
0.56
0.13
0.00
0.06
0.18
24
0.60
0.58
0.08
0.31
0.32
0.27
0.09
0.18
30
0.59
0.58
0.09
0.31
0.26
0.24
0.09
0.12
36
0.62
0.53
0.05
0.33
0.28
0.20
0.09
0.10
Total
0.59
0.55
0.10
0.34
0.27
0.21
0.09
0.14
Source:
Smoking.dta
consistent with Figure 2. From the data, the marginal eect with respect to 6-years is less than 1%
but economy as a whole could represent a large shift in smoking population.
(n) The method 2 serves better for our aim of computing the change in smoking probability induced
by a work-place smoking ban than the method 1. However, it is not clear how to divide the age bin
and this arbitrary assignment may results in an inappropriate outcome.
13