6.3 (i) The turnaround point is given by /(2| remember, this is sales in millions of dollars.

|), or .0003/(.000000014)

21,428.57;

(ii) Probably. Its t statistic is about 1.89, which is significant against the one-sided alternative H0: < 0 at the 5% level (cv 1.70 with df = 29). In fact, the p-value is about .036. (iii) Because sales gets divided by 1,000 to obtain salesbil, the corresponding coefficient gets multiplied by 1,000: (1,000)(.00030) = .30. The standard error gets multiplied by the same factor. As stated in the hint, salesbil2 = sales/1,000,000, and so the coefficient on the quadratic gets multiplied by one million: (1,000,000)(.0000000070) = .0070; its standard error also gets multiplied by one million. Nothing happens to the intercept (because rdintens has not been rescaled) or to the R2: = 2.613 (0.429) + .30 salesbil (.14) .0070 salesbil2 (.0037)

n = 32, R2 = .1484. (iv) The equation in part (iii) is easier to read because it contains fewer zeros to the right of the decimal. Of course the interpretation of the two equations is identical once the different scales are accounted for. 6.4 (i) Holding all other factors fixed we have

Dividing both sides by educ gives the result. The sign of

is not obvious, although

> 0 if we think a child gets more out of another year of education the more highly educated are the childs parents. (ii) We use the values pareduc = 32 and pareduc = 24 to interpret the coefficient on educ pareduc. The difference in the estimated return to education is .00078(32 24) = .0062, or about .62 percentage points. (iii) When we add pareduc by itself, the coefficient on the interaction term is negative. The t statistic on educ pareduc is about 1.33, which is not significant at the 10% level against a two-sided alternative. Note that the coefficient on pareduc is significant at the 5% level against a two-sided alternative. This provides a good example of how omitting a level effect (pareduc in this case) can lead to biased estimation of the interaction effect. 6.5 This would make little sense. Performances on math and science exams are measures of outputs of the educational process, and we would like to know how various

educational inputs and school characteristics affect math and science scores. For example, if the staff-to-pupil ratio has an effect on both exam scores, why would we want to hold performance on the science test fixed while studying the effects of staff on the math pass rate? This would be an example of controlling for too many factors in a regression equation. The variable scill could be a dependent variable in an identical regression equation. 7.8 (i) We want to have a constant semi-elasticity model, so a standard wage equation with marijuana usage included would be log(wage) = + usage + educ + exper + exper2 + female + u.

Then 100 is the approximate percentage change in wage when marijuana usage increases by one time per month. (ii) We would add an interaction term in female and usage: log(wage) = + + usage + educ + exper + exper2 + female

female usage + u.

The null hypothesis that the effect of marijuana usage does not differ by gender is H0: = 0. (iii) We take the base group to be nonuser. Then we need dummy variables for the other three groups: lghtuser, moduser, and hvyuser. Assuming no interactive effect with gender, the model would be log(wage) = + + lghtuser + exper +
2

moduser + female + u.

hvyuser +

educ +

exper

(iv) The null hypothesis is H0: = 0, = 0, = 0, for a total of q = 3 restrictions. If n is the sample size, the df in the unrestricted model the denominator df in the F distribution is n 8. So we would obtain the critical value from the Fq,n-8 distribution. (v) The error term could contain factors, such as family background (including parental history of drug abuse) that could directly affect wages and also be correlated with marijuana usage. We are interested in the effects of a persons drug usage on his or her wage, so we would like to hold other confounding factors fixed. We could try to collect data on relevant background information. 10.1 (i) Disagree. Most time series processes are correlated over time, and many of them strongly correlated. This means they cannot be independent across observations, which simply represent different time periods. Even series that do appear to be roughly

uncorrelated such as stock returns do not appear to be independently distributed, as you will see in Chapter 12 under dynamic forms of heteroskedasticity. (ii) Agree. This follows immediately from Theorem 10.1. In particular, we do not need the homoskedasticity and no serial correlation assumptions. (iii) Disagree. Trending variables are used all the time as dependent variables in a regression model. We do need to be careful in interpreting the results because we may simply find a spurious association between yt and trending explanatory variables. Including a trend in the regression is a good idea with trending dependent or independent variables. As discussed in Section 10.5, the usual R-squared can be misleading when the dependent variable is trending. (iv) Agree. With annual data, each time period represents a year and is not associated with any season. C12.1 Regressing on , using the 69 available observations, gives .292 and se(

) .118. The t statistic is about 2.47, and so there is significant evidence of positive AR(1) serial correlation in the errors (even though the variables have been differenced). This means we should view the standard errors reported in equation (11.27) with some suspicion.