Prof. Dr.

Kai Carstensen
Chair of Econometrics

Examination in Econometrics I

(Winter Term 2015-2016)

New examination regulation: 5 credits!!!

Februar 18, 2016 , 14.30 - 15.30

Preliminary remarks:

1. Please read these instructions carefully!

2. At the beginning of the exam, fill in the cover sheet and hand in after the exam is finished!

3. You are permitted to use the following auxiliary tools:

(a) a non–programable pocket calculator,

(b) the formulary for Econometrics I without notes!

4. Write your name and enrolment (matriculation) number on every sheet of paper!

5. Don’t use a pencil!

6. The exam consists of 4 problems printed on 4 pages plus 3 extra pages for answers. Check
your copy for completeness!

7. You have 60 minutes in total to answer the exam questions.

Good luck!
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Problem 1 (10 credits)

1. Let y, x1 and x2 be random variables, where the conditional expectation of y is

E(y|x1 , x2 ) = β0 + β1 x1 + β2 x2 + β3 x22 . (1)

Assume E(x1 ) = µ1 , E(x2 ) = µ2 , E(x22 ) = µ3 , and all necessary higher moments exist and
are finite.

(a) Derive the partial effect of x2 on E(y|x1 , x2 ).

(b) Derive the average partial effect of x2 on E(y|x1 , x2 ).
(c) Write E(y|x1 , x2 ) as a structural equation in error form with error u. Find E(u|x1 , x2 ).

2. Now assume that x1 is measured with error as x# #

1 = x1 + e1 , where x1 is the measurement
and e1 is the measurement error. Assume that the measurement error is zero on average,
E(e1 ) = 0, and uncorrelated with the other explanatory variables, i.e., Cov(x2 , e1 ) = 0 and
Cov(x22 , e1 ) = 0.

(a) Write down an estimable structural equation in terms of the observable variables x#
1
and x2 . Define the error as a function of e1 and u.
(b) State the conditions under which the OLS estimator β̂1 is biased. Explain briefly.

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Problem 2 (15 credits)

√
Let θ̂ be a N -asymptotically normal estimator for θ = (θ0 , θ1 )0 . Let γ̂ = θ̂0 θ̂1 be an estimator of
γ = θ0 θ1 .

1. Show that γ̂ is a consistent estimator of γ.

√ √
2. Find the asymptotic variance of N (γ̂ −γ) in terms of the asymptotic variance of N (θ̂−θ).

3. Suppose that, for a sample of data,

 
0 0.2 0.03
θ̂ = (0.5, 1.5) and Avar(θ̂) = V̂θ̂ =
0.03 0.5

Calculate γ̂ and its asymptotic standard error.

4. Test whether γ is significantly different from zero. State the null and alternative hypotheses.
Derive a test decision at the 5% significance level given the estimates from question 3.

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Problem 3 (15 credits)

In order to study the labor supply of married (working) women, consider the labor supply equation

hours = δ1 log(wage) + β0 + β1 educ + β2 age + β3 nwif einc + u (2)

where hours is the supply of hours (in hours per year), wage is the wage (in US dollars per hour),
age is the age (in years), nwif einc is household income other than that earned by the wife, and
educ is years of education. Assume that age, nwif einc, and educ are exogenous, i.e., uncorrelated
with u. In contrast, the wage is potentially endogenous.

1. State the conditions a variable needs to satisfy to qualify as a valid instrument for the wage.

2. Consider the case that there are as many instruments as there are regressors. Assume the
usual IV assumptions hold. Prove that the baseline IV estimator is asymptotically distributed
as √ d
N (β̂ IV − β) −→ Normal (0, V) .
Carefully state at which step you use which assumption. Also state V as a function of
moments of observable random variables.

3. Suppose you have produced consistent estimates (neglecting intercepts):

d = 1821 · log(wage) − 189 · educ − 20 · age + 2 · nwif einc

hours

Interpret the effect of the wage and of education on labor supply.

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Problem 4 (20 credits)

Suppose you study the market for locally grown potatoes in a country with underdeveloped infra-
structure (so that shipping potatoes from one county to another is prohibitively costly) based on
a sample of N counties for the year 1995. You specify demand and supply as

log(Q) = β12 log(P ) + α10 + α11 log(inc) + u1 (3)

and
log(P ) = β21 log(Q) + α20 + α21 sub + α22 weather + u2 (4)
where Q denotes the average potato quantity sold on the local market (in tons per year), P denotes
the average potato price of the county (in dollars per kilo), sub denotes the subsidies a county
receives from a supranational organization for its agricultural sector (in Million dollars per year),
weather denotes the average county temperature (in degree Celsius), and inc denotes average
annual disposable household income (in dollars). Assume sub, weather, and inc are exogenous to
the potato market.

1. Write down the model in structural matrix form. Determine the parameter matrices Γ and
∆ and the variable vectors y, z and u.

2. Check by means of the order criterion whether the equations are identified (assuming all
αij 6= 0).

3. Suppose consistent estimation yielded β̂12 = −1.5, β̂21 = 2.0, and α̂21 = −0.04.

(a) Interpret β̂12 .

(b) Calculate the reduced form effects of subsidies on the quantity and the price of potatoes
(you do not need to calculate any other reduced form effect). Use
 
−1 −0.25 −0.5
Γ̂ = .
0.375 −0.25

(c) Interpret the structural form effect and the reduced form effect of subsidies on the price
of potatoes. Briefly explain the economic mechanism by which the reduced form effect
of subsidies is absolutely much smaller than the structural form effect.

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