University of Hong Kong

Introductory Econometrics (ECON0701), Spring 2014

Assignment #1: Due February 14, 2014
1. Let r
1
, r
2
, ..., r

be independent random variables that all have the same probability distrib-
ution, with mean j and variance o
2
. Let r =
1

=1
r

.
(a) Show that 1[r] = j.
(b) Show that \ ar

1
+
2
2

=

2
2
.
(c) Show that \ ar(r) =

2

.
2. (2.2) The following table contains the ACT scores (the ACT test is a pre-matriculation
examination that some American college students take instead of the SAT) and the GPA
(grade point average) for 8 college students. Grade point average is based on a four point
scale and has been rounded to one digit after the decimal.
Student GPA ACT
1 2.8 21
2 3.4 24
3 3.0 26
4 3.5 27
5 3.6 29
6 3.0 25
7 2.7 25
8 3.7 30
(a) Estimate the relationship between GPA and ACT using OLS; that is, obtain the intercept
and slope estimates in the equation
[
G1 =
c
,
0
+
c
,
1
CT
Comment on the direction of the relationship. Does the intercept have a useful inter-
pretation here? Explain. How much higher is the GPA predicted to be if the ACT
score is increased by 5 points?
(b) Compute the tted values and residuals for each observation, and verify that the residuals
(approximately) sum to zero.
(c) What is the predicted value of GPA when ACT = 20?
(d) How much of the variation in GPA for these 8 students is explained by ACT? Explain.
1
3. (2.9) In the linear consumption function
d co:: =
c
,
0
+
c
,
1
i:c
the (estimated) marginal propensity to consume (MPC) out of income is simple the slope,
c
,
1
, while the average propensity to consume (APC) is
d co::
i:c
=
c
,
0
i:c
+
c
,
1
. Using observations
for 100 families on annual income and consumption (both measured in dollars), the following
equation is obtained:
d co:: = 124.84 + 0.853i:c
: = 100, 1
2
= 0.692
(a) Interpret the intercept in this equation, and comment on its sign and magnitude.
(b) What is the predicted consumption when family income is $30,000?
(c) With i:c on the x-axis, draw a graph of the estimated MPC and APC.
4. (2.11) The data set bwght.dta contains data on births to women in the United States. Two
variables of interest are the dependent variable, infant birth weight in ounces (bwght), and
an explanatory variable, average number of cigarettes the mother smoked per day during
pregnancy (cigs). The following simple regression was estimated using data on : = 1388
births:
/nq/t = 119.77 0.514 ciq:
(a) What is the predicted birth weight when ciq: = 0? What about when ciq: = 20 (one
pack per day)? Comment on the dierence.
(b) Does this simple regression necessarily capture a causal relationship between the childs
birth weight and the mothers smoking habits? Explain.
(c) To predict a birth weight of 125 ounces, what would cigs have to be? Comment.
5. (Computer problem) (C2.4) Use the data in the le WAGE2.DTA to estimate a simple
regression explaining monthly salary (wage) in terms of IQ score (IQ).
(a) Find the average salary and average IQ in the sample. What is the standard deviation
of IQ? (IQ scores are standardized so that the average in the population is 100 with a
standard deviation equal to 15.)
(b) Estimate a simple regression model where a one-point increase in IQ changes wage by
a constant dollar amount. Use this model to nd the predicted increase in wage for an
increase in IQ of 15 points. Does IQ explain most of the variation in wage?
(c) Now, estimate a model where each one-point increase in IQ has the same percentage
eect on wage. If IQ increases by 15 points, what is the approximate percentage increase
in predicted wage?
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