14.32 Problem Set 4 Due: Friday, November 9 1. True, False or Uncertain. Please provide an explanation for your answer.

(a) White standard errors are inconsistent if there is no heteroskedasticity, so I should test for heteroskedasticity before using them. (b) A nice feature of White standard errors is that they also take care of serially correlated errors. (c) In the presence of heteroskedasticity OLS is biased and inconsistent. (d) The F test has an F distribution whether or not there error terms are heteroskedastic adn/or serially correlated. 2. Suppose the model is Y = X + where V ar (i ) = 2 Zi and Cov (i , j ) = 0 for i = j (a) Show that OLS is unbiased. (b) Is OLS ecient?
1 (c) Is V OLS = s2 (X X) unbiased? ar

(d) Briey discuss ways to test for V ar (i ) = 2 Zi . Does it matter if Zi is a regressor? Explain. 3. Suppose that individuals consumption is a linear function of income, nancial assets and a residual term with mean 0 and variance 2 (independent of income and assets). (a) How would you estimate the coecients in the above model most eciently if you had individuallevel data? (b) How would you estimate the model most eciently if you only had state-level data on population sizes and averages of the above variables? (c) How would you estimate the model if you only had the averaged data at the level of US Congressional districts (each of which have the same number of people)? (d) Which of the three data sets you would prefer to have and why? 4. Use the data in SLEEP75.dta to estimate the following sleep equation: sleep = 0 + 1 totwork + 2 educ + 3 age + 4 age2 + 5 yngkid + 6 male + u

(a) Estimate the OLS model with both the usual and White standard errors. Interpret the cecients. Does it seem to matter which standard errors you use> (b) Write down a model that allows the variance of u to dier between men and women. The variance should not depend on other factors. (c) Estimate the parameters of the model for heteroskedasticty. (You have to estimate the sleep equation by OLS, rst, to obtain the OLS residuals.) Is the estimated variance of u higher for men or for women? 1

(d) Is the variance of u statistically dierent for men and for women? 5. Use the data in HPRICE1.dta and consider the following models for housing prices: price = log (price) = 0 + 1 lotsize + 2 sqrf t + 3 bdrms + 0 + 1 log (lotsize) + 2 log (sqrf t) + 3 bdrms + e (1) (2)

(a) Obtain both the ususal and the heteroskedasticity-robust standard errors for equation (1) . Discuss any important dierences. (b) Repeat (a) for model (2) (c) What does this example suggest about heteroskedasticity and the transformation used for the dependent variable? (d) Apply the full White test for heteroskedasticiy. Using the 2 form of the statistic, obtain the pvalue. What do you conclude?