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Econometrics I

Economics 422

Prof. Gandhi
Sample Exam 1
Your real exam is on Wednesday, March 14

Name___________________

Instructions:
- Write all answers directly on this exam in the space provided. If you need more paper,
please ask.
- You are only permitted to use a writing utensil and a standard calculator (no
communication devices) to take this exam.
- When you finish, submit your exam and you may leave.
- Please raise your hand if you have any questions during the exam.
- Turn off and put away all mobile phones and communication devices.
- Please DO NOT write on the tables. Submit these with your exam.

For SLR:
𝜎2
𝛽̂0 = 𝑦̅ − 𝛽̂1 𝑥̅ 𝑣𝑎𝑟(𝛽̂1 ) =
𝑆𝑆𝑇𝑥

𝑛
∑ (𝑥𝑖 −𝑥̅ )(𝑦𝑖 −𝑦̅) ∑𝑛 ̂𝑖2
𝑖=1 𝑢
𝛽̂1 = 𝑖=1
∑𝑛 2
2
𝜎̂ =
𝑖=1(𝑥𝑖 −𝑥̅ ) 𝑛−2
For MLR:
𝜎 2 ∑𝑛 𝑥 2 2 −𝑅 2 )/𝑞
(𝑅𝑢𝑟
𝑣𝑎𝑟(𝛽̂0 ) = 𝑖=1 𝑖
𝐹= 𝑟
2 )/𝑑𝑓
𝑛∙𝑆𝑆𝑇𝑥 (1−𝑅𝑢𝑟 𝑢𝑟
Part I: Multiple-choice (2 points each). Circle the best answer.

1. Which of the following is assumed for establishing the unbiasedness of Ordinary Least Square
(OLS) estimates?

a. The error term has an expected value of 1 given any value of the explanatory variable.
b. The error term is uncorrelated with the explanatory variables.
c. The sample outcomes on the explanatory variable are all the same value.
d. The error term has the same variance given any value of the explanatory variable.

2. The explained sum of squares (SSE) for the regression function, 𝑦𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 + 𝑢𝑖 , is


defined as _____.

a. ∑𝑛𝑖=1(𝑦𝑖 − 𝑦̅)2
b. ∑𝑛𝑖=1(𝑦̂𝑖 − 𝑦̅)2
c. ∑𝑛𝑖=1 𝑢̂𝑖2
d. ∑𝑛𝑖=1(𝑢𝑖 )2
3. Which of the following is true?
a. If a test statistic from an upper-tail test is less than the critical value, the null will be
rejected.
b. If the p-value of a test is less than the level of significance, the null will be rejected.
c. If the absolute value of a test statistic from a two-sided test is greater than the critical
value, the null will not be rejected.
d. If the value of a test statistic from a lower-tail test is greater than the critical value, the
null will be rejected.

4. Which of the following is true of R2?

a. R2 is also called the standard error of regression.


b. A low R2 indicates that the Ordinary Least Squares line fits the data well.
c. R2 usually decreases with an increase in the number of independent variables in a
regression.
d. R2 shows what percentage of the total variation in the dependent variable, Y, is
explained by the explanatory variables.

5. Consider the following estimated model of hourly wage (dollars) as a function of age (years),
and education (years). For someone who is 20 years old, what is the estimated effect of one more
year of age on wage holding education constant?
̂ = −11.388 + 1.013𝑎𝑔𝑒 − 0.015𝑎𝑔𝑒 2 + 0.059𝑒𝑑𝑢𝑐
𝑤𝑎𝑔𝑒

a. $1.01
b. $0.99
c. $0.41
d. $14.26

Part II: Short-answer problems (20 points each). Be sure to show your work and
explain answers fully. Round numerical answers to the nearest hundredth unless
otherwise specified.

6. Derive the OLS estimators for β0 and β1 in the simple linear regression model starting
with the problem that the least squares estimators solve and the first-order conditions. (8
points for β0 and 12 points for β1)

𝑦 = 𝛽0 + 𝛽1 𝑥 + 𝑢
7. Consider the following estimated model with standard errors in parentheses:

̂ = 80.29 + 5.44𝑚𝑟𝑎𝑡𝑒 + 0.269𝑎𝑔𝑒 − 0.00013𝑡𝑜𝑡𝑒𝑚𝑝


𝑝𝑟𝑎𝑡𝑒
(0.778) (0.524) (0.045) (0.000037)
𝑛 = 1533, 𝑅 2 = 0.0995

prate = percentage of employees who participate in the 401(k) plan


mrate = match rate (amount firm contributes per dollar from employee)
age = age of the 401(k) plan in years
totemp = total number of firm employees

(a) Interpret the estimated coefficient on age. (2 points)


(b) If totemp was given in thousands of employees instead of the number of employees,
what would the new estimated coefficient and its standard error be? (2 points)
(c) Construct a 90% confidence interval for 𝛽𝑎𝑔𝑒 from the equation above. What does this
interval mean, in words? (6 points)
(d) Using the confidence interval from (c), what is one kind of hypothesis test for 𝛽𝑎𝑔𝑒
that you can conduct and what is the result of this test? Provide the hypotheses, level of
significance and explain how you arrived at this result. (10 points)
8. Consider a new estimated model below (using variables as defined in question 7).

̂ = 83.42 + 0.299𝑎𝑔𝑒
𝑝𝑟𝑎𝑡𝑒
(0.738) (0.046)
𝑛 = 1533, 𝑅 2 = 0.0269

(a) Formulate null and alternative hypotheses for βage. Use a t-statistic to perform this test
at the 5% level. Be sure to include the critical value, the results of your test and show all
of your work. (6 points)
(b) Use the regression above and the one from #7 to test the null hypothesis at the 5%
level that the match rate (mrate) and number of employees (totemp) have no effect on the
participation rate (prate), controlling for the effect of the age of the 401(k) plan (age).
Provide the null and alternative hypotheses, the test statistic, the critical value and
explain the result of the test. (10 points)
(c) If there is heteroskedasticity (a violation of MLR.5), what will be the impact on the
test in part (b)? (2 points)
(d) Suppose that totemp is positively correlated with age and 𝛽1 < 0 in the model:
𝑝𝑟𝑎𝑡𝑒 = 𝛽0 + 𝛽1 𝑡𝑜𝑡𝑒𝑚𝑝 + 𝛽2 𝑎𝑔𝑒 + 𝑢

Explain what the impact of omitting totemp from the model at the top of the page (the
first model above) is. Be specific. (2 pts)

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