Econometrics: Homework

Teerawat Ruangrairatanaroje 133892

4.14
a) The expected relationships between CM and each of the other variables are
1. CM has negative relationship with FLR. That is when FLR increase, CM will decrease, vice
versa. And,
2. CM also has negative relationship with PGNP. That is when per capita GNP increase, CM will
decrease, vice versa. But,
3. CM has positive relationship with TFR. That is when TFR increase, CM will also increase.

b) CM = 263.8635153 - 2.390496025*FLR


Variable Coefficient Std. Error t-Statistic Prob.


C 263.8635 12.22499 21.58395 0.0000
FLR -2.390496 0.213263 -11.20917 0.0000


R-squared 0.669590
Mean
dependent
var

141.5000
Adjusted R-squared 0.664261
S.D.
dependent
var

75.97807
S.E. of regression 44.02399
Akaike info
criterion

10.43810
Sum squared resid 120163.0
Schwarz
criterion

10.50556
Log likelihood -332.0191 F-statistic

125.6455
Durbin-Watson stat 2.314744
Prob(F-
statistic)

0.000000
















c) CM = 263.6415856 - 2.231585732*FLR - 0.005646594817*PGNP


Variable Coefficient Std. Error t-Statistic Prob.


C 263.6416 11.59318 22.74109 0.0000
FLR -2.231586 0.209947 -10.62927 0.0000
PGNP -0.005647 0.002003 -2.818703 0.0065


R-squared 0.707665
Mean
dependent
var

141.5000
Adjusted R-squared 0.698081
S.D.
dependent
var

75.97807
S.E. of regression 41.74780
Akaike info
criterion

10.34691
Sum squared resid 106315.6
Schwarz
criterion

10.44811
Log likelihood -328.1012 F-statistic

73.83254
Durbin-Watson stat 2.186159
Prob(F-
statistic)

0.000000



d) CM = 168.3066897 - 1.768029221*FLR - 0.00551122506*PGNP + 12.86863633*TFR


Variable Coefficient Std. Error t-Statistic Prob.


C 168.3067 32.89165 5.117003 0.0000
FLR -1.768029 0.248017 -7.128663 0.0000
PGNP -0.005511 0.001878 -2.934275 0.0047
TFR 12.86864 4.190533 3.070883 0.0032


R-squared 0.747372
Mean
dependent
var

141.5000
Adjusted R-squared 0.734740
S.D.
dependent
var

75.97807
S.E. of regression 39.13127
Akaike info
criterion

10.23218
Sum squared resid 91875.38
Schwarz
criterion

10.36711
Log likelihood -323.4298 F-statistic

59.16767
Durbin-Watson stat 2.170318
Prob(F-
statistic)

0.000000


Analysis of
Variance




Source of
Variation

df Sum of Sq. Mean Sq.


ESS

3 271802.6082 90600.8942
RSS

60 91875.38 1531.25633


TSS

63 363677.9882

e) Given the regression results, model d) is the best among other models, because the adjusted R-
squared of model d) is higher than other models. Specifically, Adjusted R2 of model d) is 73.47%. This
means that 73.47% of the total variation in the dependant variable CM explained jointly by variables FLR,
PGNP, and TFR. This value is higher than the adjusted R2 of model b) and c). Therefore, by having more
independent variable such like in d) can explain CM better.
Moreover, this conclusion is confirmed by the F-statistic. Its value is significant. That is by we should
include variables FLR, PGNP, and TFR into the model.

f) By choosing other model rather than d), we are subjected to the specification error. That is we have
not included all relevant variables into the model. Therefore, this means that estimated results are
subjected to error, and might not correctly predict the estimation.

g) We would add more variables as long as the adjusted R2 increases, or as the absolute t value of the
coefficient of the added variable is larger than 1. For example, in c) we add variable PGNP into the
model. We can easy conclude that we should add PGNP by looking at PGNPs t value. In this case, it is -
2.818703. Thus, its absolute value is larger than 1. So adding PGNP into the model, the adjusted R2 will
increase. In this case, it increases from 0.664261 to 0.698081. This means that adding PGNP into the
model, the model can explain the changes in dependant variable CM better.


4.18
a) ASP = 60188.46737 - 464.0484243*RANK + 0.5395448963*TUITION +
11372.83469*RECRUITER - 13899.25105*ACCEPTANCE



Variable Coefficient Std. Error t-Statistic Prob.


C 60188.47 19212.27 3.132813 0.0031
RANK -464.0484 142.2555 -3.262076 0.0021
TUITION 0.539545 0.150573 3.583283 0.0008
RECRUITER 11372.83 4981.522 2.283004 0.0273
ACCEPTANCE -13899.25 12088.55 -1.149787 0.2564


R-squared 0.880215
Mean
dependent
var

104870.3
Adjusted R-squared 0.869326
S.D.
dependent
var

15867.67
S.E. of regression 5735.986
Akaike info
criterion

20.24336
Sum squared resid 1.45E+09
Schwarz
criterion

20.43640
Log likelihood -490.9623 F-statistic

80.83148
Durbin-Watson stat 2.419268
Prob(F-
statistic)

0.000000






















b) If we include GPA and GMAT into the model, we might miss interpret the average starting pay of
MBA graduates, because as according to correlation between GPA and ASP, and GMAT and ASP are
positive. But as according to the regression result, it suggests that they have negative relationship to
ASP. Therefore, such results conflict to the correlation and general expectation.

Correlation
ASP RANK GPA GMAT EMPGRAD TUITION RECRUITER ACCEPTANCE
ASP 1 -0.8889 0.41545 0.75303 0.44888 0.77345 0.8743 -0.7368

Included observations:
49 after adjustments




Variable Coefficient Std. Error t-Statistic Prob.


C 233920.9 66784.87 3.502603 0.0011
RANK -656.2031 177.2447 -3.702244 0.0006
GPA -8499.425 10384.75 -0.818453 0.4178
GMAT -228.1679 75.06690 -3.039528 0.0041
EMPGRAD 7298.782 15564.38 0.468941 0.6416
TUITION 0.538270 0.165236 3.257592 0.0023
RECRUITER 14951.19 4568.488 3.272678 0.0022
ACCEPTANCE -29248.70 11823.62 -2.473752 0.0176



















c) No, it does not mean that. The result suggests that, holding other variables constant, on average the
more expensive business school, the likely the average starting pay will be. The proxy for variable Tuition
is that

d) Since both variable GPA and GMAT are linearly related, we cannot assess the individual effect of
GPA and GMAT on ASP.





e)
Analysis of
Variance




Source of
Variation

df Sum of Sq. Mean Sq.


ESS

4 1.09E+10 2.72E+09
RSS

44 1.45E+09 3.37E+09


TSS

48 1.23E+10
F statistic = 80.83148

Therefore, the F value is significant. We reject the null hypothesis that all partial slope
coefficients are zero.

f) F = (R
2
/4)/[(1-R
2
)/44]
= (0.880215/4)/[(1-0.880215)/44]
= 0.22005375/0.002722386
= 80.83121