Economics 231W, Econometrics

University of Rochester
Fall 2008
Homework: Chapter 9
Text Problems: 9.1, 9.5, 9.10, 9.12, 9.15
9.1.

(a) In a log-log model the dependent and all explanatory variables

are in the logarithmic form.
(b) In the log-lin model the dependent variable is in the logarithmic
form but the explanatory variables are in the linear form.
(c) In the lin-log model the dependent variable is in the linear form,
whereas the explanatory variables are in the logarithmic form.
(d) It is the percentage change in the value of one variable for a
(small) percentage change in the value of another variable. For the
log-log model, the slope coefficient of an explanatory variable gives
a direct estimate of the elasticity coefficient of the dependent
variable with respect to the given explanatory variable.
X
.
Y

(e) For the lin-lin model, elasticity = slope

Therefore the

elasticity will depend on the values of X and Y. But if we choose X

and Y , the mean values of X and Y, at which to measure the
X
Y

elasticity, the elasticity at mean values will be: slope

9.5.

(a) True.

dY X
d ln Y

, which, by definition, is elasticity.

=
dX Y
d ln X

(b) True. For the two-variable linear model, the slope equals B2
and

X
X
= B2
, which varies from
Y
Y

the elasticity = slope

Y
, which
X

point to point. For the log-linear model, slope = B2

varies from point to point while the elasticity equals B2 . This can
be generalized to a multiple regression model.
(c) True. To compare two or more R 2s , the dependent variable
must be the same.
(d) True. The same reasoning as in (c).
(e) False. The two r 2 values are not directly comparable.
9.10.

(a) In Model A, the slope coefficient of -0.4795 suggests that if the

price of coffee per pound goes up by a dollar, the average
consumption of coffee per day goes down by about half a cup. In
Model B, the slope coefficient of

-0.2530 suggests that if

the price of coffee per pound goes up by 1%, the average

consumption of coffee per day goes down by about 0.25%.
1.11
= -0.2190
2.43

(b) Elasticity = -0.4795

(c) -0.2530

(d) The demand for coffee is price inelastic, since the absolute value
of the two elasticity coefficients is less than 1.
(e) Antilog (0.7774) = 2.1758. In Model B, if the price of coffee
were $1, on average, people would drink approximately 2.2 cups of
coffee per day. [Note: Keep in mind that ln(1) = 0].
(f) We cannot compare the two r 2 values directly, since the
dependent variables in the two models are different.
9.12.

(a) A priori, the coefficients of ln(Y / P) and ln BP should be

positive and the coefficient of ln EX should be negative.

The

results meet the prior expectations.

(b) Each partial slope coefficient is a partial elasticity, since it is a
log-linear model.
(c) As the 1,120 observations are quite a large number, we can use
the normal distribution to test the null hypothesis. At the 5% level of
significance, the critical (standardized normal) Z value is 1.96. Since,

in absolute value, each estimated t coefficient exceeds 1.96, each

estimated coefficient is statistically different from zero.
(d) Use the F test. The author gives the F value as 1,151, which is
highly statistically significant. So, reject the null hypothesis.
9.15.

(a)

1
= 0.0130 + 0.0000833 X i
Yi

t = (17.206)

(5.683)

r 2 = 0.8015

The slope coefficient gives the rate of change in mean (1 / Y) per unit
change in X.
(b)

dY
B2

dX
( B1 B2 X i ) 2

At the mean value of X, X = 38.9, this derivative is -0.3146.

(c) Elasticity =

dY X

. At X = 38.9 and Y = 63.9, this elasticity

dX Y

coefficient is -0.1915.
1
Xi

= 55.4871 + 112.1797
(d) Y
i

t = (17.409)

(4.245)

r 2 = 0.6925

(e) No, because the dependent variables in the two models are
different.
(f) Unless we know what Y and X stand for, it is difficult to say
which model is better.
Other Problems:
1. For each of the following scenarios write out the functional form of the regression
model you would use.
a. Suppose X is the price of apples and Y is the quantity of apples and you want to
calculate the own price elasticity.
lnYi = B1 + B2lnXi + ui
b. Suppose X represents expenditures on pollution reduction and Y represents the level
of emissions, (which will never fall all the way to zero).
Yi = B1 + B2(1/Xi) + ui
c. Suppose you want to calculate the compound growth rate of income, Y.

lnYi = B1 + B2t + ui
d. Suppose you think the growth rate of income, X, has an effect on the level of the stock
market, Y.
Yi = B1 + B2lnXi + ui
e. Suppose X is the quantity of labor and Y is the quantity of capital and you want to
calculate the elasticity of substitution between capital and labor.
lnYi = B1 + B2lnXi + ui
2. Use the data Wage and Experience which contains information on the wage,
educational attainment (number of years of education) and experience (number of
years on the job) for 526 individuals, from the course website.
a. Use OLS to estimate the regression equation and report the results in the
appropriate format:
wagei b1 b2 edu b3 exp i b4 exp i2 ei
SUMMARY
OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.519
0.269
0.265
3.166
526

ANOVA
df
Regression
Residual
Total

Intercept
Education
Experience
Experience^2

3
522
525

SS
1927.877
5232.538
7160.414

Coefficient
s
-3.965
0.595
0.268
-0.005

Standard
Error
0.752
0.053
0.037
0.001

MS
642.626
10.024

t Stat
-5.271
11.228
7.271
-5.611

F
64.109

Significance
F
0.000

Pvalue
0.000
0.000
0.000
0.000

b. Interpret the regression results.

Each additional year of education increases the average hourly wage by $0.60.

Each additional year on the job increase the average hourly wage by $0.27.
A one unit increase in experience squared decreases the average hourly wage
by less than $0.01
c. Set up and test the appropriate hypothesis to determine if exp2 statistically
significant at the 1% level (two-sided)?
The t-critical value is 2.576 therefore reject H0
d. Set up and test the joint hypothesis that all slope coefficients are equal to
zero at the 5% level of significance.
F-critical value is 2.60, therefore reject H0
e. At what value of exp does additional experience actually lower the
predicted wage?
wagei b1 b2 edu b3 exp i b4 exp i2 ei

Take the derivative with respect to exp and set equal to zero. Solve for exp.
wage
b3 2b4 exp 0
exp

exp

0.268
26.8
2 * 0.005

Which means that after 26.8 years experience has a negative impact on wage.