T test can only test one restriction at a time,

Whether its equal to, or less than or greater than a value,

F test allows testing of more than restriction at the same time

1. EXP ( Household Expenditure)

=> b2 = 0.037 ,
If total expenditure increases by $1 then food expenditure increases by 3.7 cents
Where size of the household is fixed (all things equal)

=> b3 = 560,
If the size of the household increases by 1 then food expenditure increases by $560,
all else equal

=>b1 = 885
If a household has no people and expenditure is 0 and, then food expenditure is
$884 (no practical meaning)

Y intercept guarantees a relationship between the residuals and the regressors, and
that they have 0 covariance (no relationship)

2. Size is negative, economies of scale for food consumption (less wasted food)
As household size increases, food expenditure decreases

F test, imposing a test that the regressors are equal to 0

F test has 2 degrees of freedom (n-k), identify q such that

F(q, n-k)

Q is always the number of restrictions imposed

K being the number of parameters

Ho: B2 = B3=0 OR B2 = 0, B3=0

Therefore q = 2

F(2, 868 – 3 = 865)

2 versions of the F test

(𝑅𝑢2 −𝑅𝑟 2 )/𝑞

F(test_ = (1−𝑅𝑢2 )/(𝑛−𝑘)

Ru: R^2 of unrestricted model, which has more things

Rr: R^2 of restricted model, which has less things
Restricted model
Ho: B2 = B3 = 0

FDHPC = B1 + B2E + B3Size = B1

If something is regressed on a constant, regression line is a constant,

Rr^2 = 0 for this case as this is a significance test of the regression

𝑅𝑢2 /𝑞 0.2889/2
F(test) = (1−𝑅𝑢2 )/(𝑛−𝑘) = (1−1−0.2889)/(865) = 176

B1 +- SE(b1) * f

B1 – x, B1, + x

Take the two extremes and divide them by 2.

CI:

(1561.8 – 1298.4)/2

b1 + x = 1561.8
b1 – x = 1298.4

b1 = 1430 (the midpoint between the two extremes)

Z formula to find Std error of b1

T(test) = (b1 – 0 )/se(b1) =>

se(b1) = b1/t(test)
= 1430 / 21.31 = 67.1

Interpretations

B2 = 0.032

If expenditure per person increases by $1, food expenditures by $0.032, all else
equal

B3 = -134

If size increases by 1 person then food expenditure per person decreases by $134, all
else equal

B1 = 1430
 If household size is 0 and expenditure per person is 0, then food expenditure per
person is 1430.

(do not add all else equal for constant interpretations.

3.
i)
Ho : B2 = B3 = B4 = B5 = 0
Ha : not Ho

F Test is always positive, so no need for absolutes

DR: Reject Ho if F(test) > F(crit) = F(q, n-k, alpha) = F(4, 142-5,0.05) = 2.37

Alpha = 0.05

Choose the table based upon alpha (different tables for different alphas)

(𝑅𝑢2 −𝑅𝑟 2 )/𝑞 (0.039−0)/4

F(test) =(1−𝑅𝑢2 )/(𝑛−𝑘) = (1−0.039)/137 = 1.41

Fail to reject Ho as F(test) < F(crit)

F(test) < Fcrit = 2.37

ii)
Ho : B2 = B3 = B4 = B5 = 0
Ha : not Ho

Q, n, k, alpha remain unchanged, so use the test from before,

(𝑅𝑢2 −𝑅𝑟 2 )/𝑞 (0.033−0)/4

F(test) =(1−𝑅𝑢2 )/(𝑛−𝑘) = (1−0.033)/137 = 1.176

Fail to reject Ho as F(test) < F(crit)

F(test) < Fcrit = 2.37

iii)

As a group, we failed to reject Ho, so now we look at each of them in isolation (so 4
hypotheses tests)

Alpha and n-k degrees of freedom is identical for each of them

Values in the brackets under the coefficient is the standard error,

 Bi t(test) I t(test) I
B2 0.327/0.203 1.611
B3 0.069/0.08 0.863
B4 -4.77/3.39 1.407
B5 7.24/6.31 1.147

The critical value for each of these tests is

T(crit) = t(n-k), 0.025 = t(137,0.025) = 1.984

Therefore fail to reject any of them as t(test) < t(crit)

The model has weak explanatory power for returns as indicated by the low R^2 (only
explains 4% of the variability), and the F test results (as a group they do not do well)

5i)

We want to test Ho: B3= 0 , Ho: B4 = 0

Bi t(test) I t(test) I
B3 -11.13/5.88 1.89
B4 2.2/1.45 1.52

The critical for both tests is

T(crit) = t(n-k, alpha/ 2) = t(7.02, 0.025) = 1.96

Fail to reject either Ho’s as t(test) < 1.96

ii

Jointly they may be significant

Ho : B3 = B4 = 0
Ha : not Ho

DR: Reject Ho if F(test) > Fcrit = F(q, n-k, alpha) = F(2, 706 – 4, 0.05) = 3

K is from the the unrestricted model, never use k from the restricted model
706 is large enough to use infinity approximation.
 (0.113−0.103)/2
F(test) =(1−0.113)/(702) = 3.96

F(test)> F crit ( reject Ho)

Dropping age and education has very little impact on the coefficients for total work:
age and education are not highly correlated

(look at remaining regressors)

It doesn’t have much of an effect on the coefficients, relationship between total
work and age and education isn’t strongly correlated.

6.

Ho: B2 – 3B =1
Let B2 – 3B3 = Theta1
If Theta1 = 0, then Ho holds
Ie B2 – 3B3 = 0
B2 = 3B3

B4 + 3B3 – 4B2 = 0 (theta1)

Sub in the restriction into the model. First make the subject of the restriction, a
coefficient you have in the model ie B2 or B3
 B2 = Theta1 + 3B3 *
 Now substitute * into the model

Y = B1 + B2x2 + B3x3 + B4x4

Y = B1 + (theta1+ 3B3)x2 + B3x3 + B4x4 + error
Y = B1 + theta1x2 + 3B3x2 + B3x3 + B4x4 + error
Y = B1 + theta1x2 + B3(3x2 + x3) + B4x4 + error

If theta1 = 0

Let z = 3x2 + x3
Then the test B2 – 3B3 = 0 is equivalent to testing theta1 = 0 in L

Let z = 3x2 + x3

Y = B1 + theta1x2 + B3 z + B4x4 + error

Ho: B2 – 3B3 = 0