List of Tables and Figures

Contents Page No.

Table 1.1: OLS Estimates of X and Y -------------------------------------------------------------- 02

Table 2.1: OLS Estimates of Income and Consumption ----------------------------------------- 04
Table 3.1: OLS Estimates of Birth_Weight, Cig and Family _ Income ----------------------- 05
Table 3.2: OLS Estimates of Birth_Weigh, and Family _ Income ----------------------------- 06
Table 3.3: OLS Estimates of Birth_Weight and Cig --------------------------------------------- 07
Table 3.4: Comparison of OLS Estimates of Birth_Weight, Cig and Family _ Income ---- 08
Table 3.5: Wald Test ----------------------------------------------------------------------------------09
Table 3.6: Redundant Variables: CIGS ------------------------------------------------------------ 10
Table 3.7: Omitted Variables Test ------------------------------------------------------------------ 10
Table 4.1: OLS Estimates of Cobb Douglas model ---------------------------------------------- 11
Table 4.2: Wald Test ----------------------------------------------------------------------------------12

Figure 1.1: Scatter Plot; Relationship between X and Y -----------------------------------------03

 Assignment # 3

Question No 1: The following data refer to the quantity sold for a good Y(measured in Kg) and
the price of that good X(measured in Pk.Rupees) for 10 days for a particular store.

Days Y X
1 198 23
2 181 24.5
3 170 24
4 179 27.2
5 163 27
6 145 24.4
7 167 24.7
8 203 22.1
9 251 21
10 147 25

a. Assuming a linear relationship among the two variables obtain the OLS estimates of α
and β and interpret the results

Table 1.1: OLS Estimates of X and Y

Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C 456.6594 97.88441 4.665293 0.0016
X -11.3734 4.018293 -2.8304 0.0221
Statistical Measures
R-squared 0.500349 Adjusted R-squared 0.437892
F-statistic 8.011172 Prob(F-statistic) 0.022137
Dependent Variable; Y : Quantity of goods sold
Independent Variable; X: Price of a good
Constant: C

Interpretation:

 Table 1.1 argues that if price of good is zero than still 456.6594 units are sold. t-
calculated (4.665293) is greater than t-critical (1.645), and p-value (0.001) is less than 10
%, so coefficient of constant is significant at 1%.

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 Assignment # 3

 One unit increase in price decreases 11.3734 units of quantity of goods sold. t-calculated
(2.8304) is greater than t-critical (1.96), and p-value (0.02) is less than 10 %, so The
coefficient of X is significant at 5%, this leads to acceptance of H1.
 Estimated model will be;
Y= α + βX
Y = 456.6594 - 11.3734X

 R-squared shows that 50.03% variation in Y is explained by X.

 Probability of F-statistics (0.002) is less than 10 %, this illustrates that model is good fit.

b. Draw scatter diagram of the data.

260

240

220

200
Y

180

160

140
20 21 22 23 24 25 26 27 28

Figure 1.1: Scatter Plot; Relationship between X and Y

Scatter plot shows inverse linear relationship between X (Price of a good) and Y (quantity of
goods sold). It assumes that increase in price of a good leads to decrease in quantity of goods
sold.
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 Assignment # 3

Question No 2:
In the Keynesian consumption function Ct= α + βYdt where β is marginal propensity to consume
and α is intercept.

a. Use the Yearly total consumption and income (GDP) data for Pakistan to estimate this
equation. Interpret the estimated results.
Table 2.1: OLS Estimates of Income and Consumption
Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C -367181 61471.04 -5.97323 0.000
Yd 0.930683 0.004182 222.5474 0.000
Statistical Measures
R-squared 0.999637 Adjusted R-squared 0.999617
F-statistic 49527.35 Prob(F-statistic) 0.000
Dependent Variable; Ct : Yearly total consumption
Independent Variable; Yd: Income (GDP)
Constant: C

Data is collected from Pakistan Bureau of Statistics Government of Pakistan, Retrieved from
http://www.pbs.gov.pk/sites/default/files//tables/Table-2.pdf
Interpretation:

 Table 2.1 demonstrates that if income (GDP) is zero than yearly final consumption of
Pakistan is -367181 units. t-calculated (5.97323) is greater than t-critical (1.645), and p-
value (0.000) is less than 10 %, so coefficient of constant is significant at 1%.
 One unit increase in income (GDP) increases 0.930683 units of consumption. t-calculated
(222.5474) is greater than t-critical (1.645), and p-value (0.000) is less than 10 %, so The
coefficient of income (GDP) is significant at 1%, this leads to acceptance of H1.
 Estimated model will be;
Ct= α + βYdt
Ct = -367181- 0.930683Ydt

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 Assignment # 3

 R-squared explains that 99.9637% variation in Yearly final consumption is explained by

income (GDP).
 Probability of F-statistics (0.000) is less than 10 %, this shows that model is good fit.

b. Calculate the predicted consumption of a hypothetical GDP of 100 Billion.

Ct= α + βYdt
Ct = -367181+ 0.930683Ydt
Ct = -367181+ 0.930683(100,000,000,000)
Ct = 9.306793E+10

Question No 3: The file health.xls contains data for the following variables: birth_weight, cig
and family _ income. Higher the family income the better the access to parental care from the
family in general. Therefore, we would expect that both variables should affect birth_weight.

I. Run a regression that includes both variables and explain the sign of the coefficients.

Table 3.1: OLS Estimates of Birth_Weight, Cig and Family _ Income

Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C 116.9741 1.048984 111.5118 0.000
FAMINC 0.092765 0.029188 3.178195 0.0015
CIGS -0.46341 0.091577 -5.06032 0.000

Statistical Measures
R-squared 0.029805 Adjusted R-squared 0.028404
F-statistic 21.27392 Prob (F-statistic) 0.000
Dependent Variable; Birth_Weight
Independent Variable; Cig
FAMINC; family _ income
Constant: C

Interpretation:

 Table 3.1 shows that if family income and cig are zero than still there are 116.9741 units
of birth_weight. t-calculated (111.5118) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so coefficient of constant is significant at 1%.

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 Assignment # 3

 One unit increase in family income increases 0.092765 units of birth_weight assuming
that cig is constant. t-calculated (3.178195) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so The coefficient of family income is significant at 1%, this
leads to acceptance of H1.
 One unit increase in cig decreases 0.46341 units of birth_weight assuming that family
income is constant. t-calculated (5.06032) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so The coefficient of cig is significant at 1%, this leads to
acceptance of H2.
 Estimated model will be;
Birth_Weight = α + β1 FAMINC+ β2 CIG
= 116.9741 + 0.092765 FAMINC - CIG 0.46341
 Adjusted R-squared explains that 2.8404% variation in Birth_Weight is explained by
Family income and Cig.
 Probability of F-statistics (0.000) is less than 10 %, this shows that model is good fit.

II. Estimate regression that includes only fam_inc, and comment on your results.

Table 3.2: OLS Estimates of Birth_Weigh, and Family _ Income

Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C 115.265 1.001901 115.0463 0.000
FAMINC 0.118323 0.029002 4.079893 0.000
Statistical Measures
R-squared 0.011867 Adjusted R-squared 0.011154
F-statistic 16.64553 Prob(F-statistic) 0.000048
Dependent Variable; Birth_Weight
Independent Variable; FAMINC; family _ income
Constant: C

Interpretation:

 Table 3.2 shows that if family income is zero than still there are 115.265 units of
birth_weight. t-calculated (115.0463) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so coefficient of constant is significant at 1%.

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 Assignment # 3

 One unit increase in family income increases 0.118323 units of birth_weight. t-calculated
(4.079893) is greater than t-critical (1.645), and p-value (0.000) is less than 10 %, so The
coefficient of family income is significant at 1%, this leads to acceptance of H1.
 Estimated model will be;
Birth_Weight = α + β1 FAMINC
= 115.0463+ 0.118323 FAMINC
 Adjusted R-squared explains that 1.1867% variation in Birth_Weight is explained by
Family income.
 Probability of F-statistics (0.000) is less than 10 %, this shows that model is good fit.

III. Estimate a regression that includes only cig. And comment on your results.

Table 3.3: OLS Estimates of Birth_Weight and Cig

Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C 119.7719 0.572341 209.2668 0.000
CIGS -0.51377 0.090491 -5.67761 0.000
Statistical Measures
R-squared 0.022729 Adjusted R-squared 0.022024
F-statistic 32.23524 Prob(F-statistic) 0.000
Dependent Variable; Birth_Weight
Independent Variable; Cig
Constant: C

Interpretation:

 Table 3.3 shows that if cig is zero than still there are 119.7719 units of birth_weight. t-
calculated (209.2668) is greater than t-critical (1.645), and p-value (0.000) is less than 10
%, so coefficient of constant is significant at 1%.
 One unit increase in cig decreases 0.51377 units of birth_weight assuming that family
income is constant. t-calculated (5.67761) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so The coefficient of cig is significant at 1%, this leads to
acceptance of H1.

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 Assignment # 3

 Estimated model will be;

Birth_Weight = α + β1 CIG
= 119.7719 - 0.51377 CIG

 Adjusted R-squared explains that 2.2729% variation in Birth_Weight is explained by Cig.

 Probability of F-statistics (0.000) is less than 10 %, this shows that model is good fit.

IV. Present all three regressions summarized in a table and comment on your results,
especially by comparing the changes in the estimated effects and the R2 of the three
different models. What does the F statistics suggest about the joint significance of the
explanatory variables in the multiple regression case?

Table 3.4: Comparison of OLS Estimates of Birth_Weight, Cig and Family _ Income
Estimates
Variables Model 1 Model 2 Model 3
116.9741*** 115.265*** 119.7719***
Constant (1.048984) (1.001901) (0.572341)
[111.5118] [115.0463] [209.2668]

0.092765** 0.118323***
Family Income (0.029188) (0.029002)
[3.178195] [4.079893]

-0.46341*** -0.51377***
Cigs (0.091577) (0.090491)
[-5.06032] [-5.67761]
Statistical measures
R -Squared 0.029805 0.011867 0.022729
Adjusted R square 0.028404 0.011154 0.022024
F-Statistics 21.27392 16.64553 32.23524
Prob(F-statistic) 0.000 0.000048 0.000
Dependent Variable; Birth_Weight
Independent Variable; Cig
FAMINC; family _ income
Constant: C
*** Sig. at 1%, ** Sig. at 5%, ( ) Standard Error, and [ ] t-Statistics

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 Assignment # 3

Interpretation:
 Table 3.4 shows that intercept of model 3 is higher than model 1 and 2 and intercept of
model 1 is slightly higher than model 2.
 In model 1 there is 0.092765 units effect of family income on birth-weight while in
model 2 its effect is 0.118323 which is greater than model 1. In model 1 the effect of cig
on birth-weight is -0.46341 whereas its effect in model 3 is -0.51377 which is greater
than model 1. These shows that in simple linear regression model the effect of individual
independent variable is higher than combine effect in multiple regression models. All
coefficients of independent variables are significant 1%.
 R-squared demonstrates that by adding both variables the dependent variable is 2.9805%
that is greater than other models. In model 2 little variation (1.1867%) is explained by
family income while greater variation (2.2729%) is explained by cig as compared to
model 2.
 There is minor change in R-squared and Adjusted R-squared by excluding family income
from the model, this means that it has no impact on model by adding and excluded this
variable, but by excluding cig variable from model there is high change in R-squared and
Adjusted R-squared, this means that cig has greater impact on model by adding it or
excluding it as relative to family income.
 All models’ F-statistics are significant at prob(f-statistic) = 0.000, so all models are good
fit. The F-statistics also suggest that explanatory variables in the multiple regression case
are jointly significant.

V. Test the hypothesis that the effect of cig is two times bigger than the respective effect of
fam_inc using Wald test.

Table 3.5: Wald Test:

Ho: C(2)=2*C(3); The effect of cig is two times bigger than the respective
effect of fam_inc
Test Statistic Value df Probability
t-statistic -6.507652 1385 0.000
F-statistic 42.34954 (1, 1385) 0.000
Chi-square 42.34954 1 0.000

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 Assignment # 3

Interpretation:

Table 3.5 shows that Prob (F-statistics) is less than 0.05 so reject H0. This suggests that the
effect of cig is NOT two times bigger than the respective effect of fam_inc.

VI. Conduct a redundant variable test for explanatory variable cig. Comment on your
results.

Table 3.6: Redundant Variables: CIGS

Null hypothesis: The errors are independent and identically distributed normal
random variables and the model is linear.
Value df Probability
t-statistic 5.677609 1386 0.000
F-statistic 32.23524 (1, 1386) 0.000
Likelihood ratio 31.91208 1 0.000

Interpretation:

Table 3.6 shows that Prob (F-statistics) is less than 0.05 so reject H0. This argues that the errors
are NOT independent and are NOT identically distributed normal random variables and the
model is NON linear.

VII. Estimate a model with only cig as independent variable and then conduct an omitted
variable test for fam_inc in the model. Comment on your results.

Table 3.7: Omitted Variables Test

Null hypothesis: FAMINC are jointly insignificant
Value df Probability
t-statistic 3.178195 1385 0.0015
F-statistic 10.10092 (1, 1385) 0.0015
Likelihood ratio 10.08607 1 0.0015

Interpretation:

Table 3.7 shows that Prob (F-statistics) is less than 0.05 so reject H0. This argues that additional
set of regressors are jointly significant which means that FAMINC are jointly significant.
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 Assignment # 3

Question No 4: The file Cobb_Douglas_US.xls. Contains data for output (Y), labor (L) and
stock of capital (K) for the United States.

a. Estimate a Cobb Douglas type regression equation and interpret the estimated
coefficients

Hint: First convert Cobb Douglas model into linear model by applying log.
Table 4.1: OLS Estimates of Cobb Douglas model
Estimates
Variable Coefficient Std. Error t-Statistic Prob.
C 5.588666 0.287104 19.46566 0.000
LNL 0.163447 0.101598 1.608764 0.1098
LNK 0.442045 0.00813 54.37352 0.000
Statistical Measures
R-squared 0.957656 Adjusted R-squared 0.957091
F-statistic 1696.193 Prob(F-statistic) 0.000
Dependent Variable; Output (Y)
Independent Variable; Labor (L)
Stock of capital (K)
Constant: C

Interpretation:

 Table 4.1 shows that if labor and stock of capital are zero than still there are 5.588666
units of output. t-calculated (19.46566) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so coefficient of constant is significant at 1%.
 One unit increase in labor increases 0.163447 units of output assuming that stock of
capital is constant. t-calculated (1.608764) is greater than t-critical (1.645), and p-value
(0.1098) is greater than 10 %, so The coefficient of labor is insignificant at 10%, this
leads to rejection of H1 and acceptance of Ho.
 One unit increase in stock of capital increases 0.442045 units of output assuming that
labor is constant. t-calculated (54.37352) is greater than t-critical (1.645), and p-value
(0.000) is less than 10 %, so The coefficient of stock of capital is significant at 1%, this
leads to acceptance of H2.
 Estimated model will be;

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 Assignment # 3

Y=L β1K β2
Converting it into linear model by adding log (ln), we get;
Ln Y = α + β1 ln(L)+ β2 ln(K)

Y = 5.588666 + 0.163447 L+ 0.442045 K

 Adjusted R-squared explains that 95.7091% variation in output is explained by labor and
stock of capital.
 Probability of F-statistics (0.000) is less than 10 %, this shows that model is good fit.

b. Also check for returns to scale using the Wald Test.

Table 4.2: Wald Test

Ho: C(2) + C(3) =1; Constant returns to scale
Test Statistic Value df Probability
t-statistic -3.97725 150 0.0001
F-statistic 15.81852 (1, 150) 0.0001
Chi-square 15.81852 1 0.0001

Interpretation:

Table 4.2 shows that Prob (F-statistics) is less than 0.05 so reject H0. This suggests that there is
NO constant return to scale.

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