Week4TutorialExercises

ReviewQuestions(thesemayormaynotbediscussedintutorialclasses)
Whatdowemeanwhenwesayregresswageoneducandexpr? UseOLStoestimatethemultiplelinearregressionmodel:wage=0+1educ+2expr+u. Whyandunderwhatcircumstancedoweneedtocontrolforexprintheregressionmodelin ordertoquantifytheeffectofeduconwage? Weneedtocontrolforexprinthemodelwhenthepartialorceterisparibuseffectofeducon wageistheparameterofinterestandexprandeducarecorrelated. Whatisthebiasofanestimator? bias=E( )j. Whatistheomittedvariablebias? Itisthebiasresultedfromomittingrelevantvariablesthatarecorrelatedwiththeexplanatory variablesinaregressionmodel. Whatistheconsequenceofaddinganirrelevantvariabletoaregressionmodel? IncludinganirrelevantvariablewillgenerallyincreasethevarianceoftheOLSestimators. WhatistherequirementoftheZCMassumption,inyourownwords? Youmustdothisbyyourself. WhyassumingE(u)=0isnotrestrictivewhenaninterceptisincludedintheregressionmodel? Whenthemeanvalueofthedisturbanceisnotzero,youcanalwaysdefinethenewdisturbance astheoriginaldisturbanceminusthemeanvalue,anddefinethenewinterceptastheoriginal interceptplusthemeanvalue. Intermsofnotation,whydoweneedtwosubscriptsforindependentvariables? Inournotation,thefirstsubscriptisforindexingobservations(1stobs,2ndobs,etc.)andthe secondsubscriptisforindexingvariables(1stvariable,2ndvariable,etc.). UsingOLStoestimateamultipleregressionmodelwithkindependentvariablesandan intercept,howmanyfirstorderconditionsarethere? k+1. HowdoyouknowthattheOLSestimatorsarelinearcombinationsoftheobservationsonthe dependentvariable? Bythefirstorderconditions,weseethattheOLSestimatorsarethesolutiontok+1linear equationswithk+1unknowns.Therighthandsidesoftheequationsarelinearfunctionsof observationsonthedependentvariable(sayy).Hencethesolutionislinearcombinationsofthe yobservations. WhatisGaussMarkovtheorem?Readthetextbook. TrytoexplainwhyR2neverdecreases(itislikelytoincrease)whenadditionalexplanatory variablesareaddedtotheregressionmodel. First,thesmalleristheSSR,thegreateristheRsquared.TheOLSchoosesparameterestimates tominimisetheSSR.Withextraexplanatoryvariables,theRsquareddoesnotdecreasebecause theSSRdoesnotincrease,whichistruebecausetheOLShasalargerparameterspacetochoose estimates(morepossibilitiestomakeSSRsmall). Whatisanendogenousexplanatoryvariable?Exogenousexplanatoryvariable? Seethetopofpage88.

WhatismulticollinearityanditslikelyeffectontheOLSestimators?Readpages9599.

ProblemSet(thesewillbediscussedintutorialclasses)
Q1.Wooldridge3.2 (i)Yes.Becauseofbudgetconstraints,itmakessensethat,themoresiblingsthereareina family,thelesseducationanyonechildinthefamilyhas.Tofindtheincreaseinthenumberof siblingsthatreducespredictededucationbyoneyear,wesolve1=.094(sibs),sosibs=1/.094 10.6. (ii)Holdingsibsandfeducfixed,onemoreyearofmotherseducationimplies.131yearsmoreof predictededucation.Soifamotherhasfourmoreyearsofeducation,hersonispredictedto haveaboutahalfayear(.524)moreyearsofeducation. (iii)Sincethenumberofsiblingsisthesame,butmeducandfeducarebothdifferent,the coefficientsonmeducandfeducbothneedtobeaccountedfor.Thepredicteddifferencein educationbetweenBandAis.131(4)+.210(4)=1.364. Q2.Wooldridge3.10 (i)Becausex1ishighlycorrelatedwithx2andx3,andtheselattervariableshavelargepartial effectsony,thesimpleandmultipleregressioncoefficientsonx1candifferbylargeamounts. Wehavenotdonethiscaseexplicitly,butgivenequation(3.46)andthediscussionwithasingle omittedvariable,theintuitionisprettystraightforward. (ii)Herewewouldexpect and tobesimilar(subject,ofcourse,towhatwemeanby almostuncorrelated).Theamountofcorrelationbetweenx2andx3doesnotdirectlyeffectthe multipleregressionestimateonx1ifisessentiallyuncorrelatedwithx2andx3. (iii)Inthiscaseweare(unnecessarily)introducingmulticollinearityintotheregression:x2andx3 havesmallpartialeffectsonyandyetx2andx3arehighlycorrelatedwithx1.Addingx2andx3 likelyincreasesthestandarderrorofthecoefficientonx1substantially,sose( )islikelytobe muchlargerthanse( ). (iv)Inthiscase,addingx2andx3willdecreasetheresidualvariancewithoutcausingmuch collinearity(becausex1isalmostuncorrelatedwithx2andx3),soweshouldseese( )smaller thanse( ).Theamountofcorrelationbetweenxanddoesnotdirectlyaffectse( ). (i)Theestimatedequationis

Q3.WooldridgeC3.2(hprice1_ch03.do) (ii)Holdingsquarefootageconstant,(thepriceincrease)=15.20(increaseinbedroom).Hence thepriceincreasesby15.20,whichmeans$15,200. (iii)Now(thepriceincrease)=.128(increaseinsquarefeet)+15.20(increaseinbedroom)= .128(140)+15.20(1)=33.12.Thatis$33,120.Becausethehousesizeisincreasing,theeffectis largerthanthatin(ii). (iv)About63.2% (v)Thepredictedpriceis19.32+.128(2438)+15.20(4)=353.544,or$353,544. (vi)Theresidual=300,000353,544=53,544.Thebuyerunderpaid,judgedbythepredicted price.But,ofcourse,therearemanyotherfeaturesofahouse(somethatwecannoteven measure)thataffectprice.Wehavenotcontrolledforthose. Q4.WooldridgeC3.6(wage2_ch03_c3_6.do) (i)TheslopecoefficientfromregressingIQoneducis3.53383. (ii)Theslopecoefficientfromlog(wage)oneducis.05984. (iii)Theslopecoefficientfromlog(wage)oneducandIQare.03912and.00586respectively.

(iv)Thecomputed 1 1 2 =.03912+3.53383(.00586).05984.