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STUDENT IDENTIFICATION NO

MULTIMEDIA UNIVERSITY

FIRST TRIMESTER FINAL EXAMINATION, 2008/2009 SESSION

BEC2044 ECONOMETRICS I
(All Sections / Groups)

15 OCTOBER 2008
2.30 PM 4.30 PM
(2 Hours)

INSTRUCTIONS TO STUDENT

1. This Question paper consists of FOUR pages with THREE questions only.

2. Attempt ALL questions. The distribution of the marks for each question is given.

3. Write all your answers in the answer booklet provided.

4. Formulas and statistical tables are attached.

BEC2044 ECONOMTRICS I 15 OCTOBER 2008

KWLR/TSH Page 1 of 4

QUESTION 1

To understand the petrol consumption behaviours, petrol consumption patterns in 50
countries for year 2007 were analysed. The following regression result was obtained.

15.628 Statistics Bera Jarque
0.814 R
(95.2) (0.2) (0.8) (12.4) (258.1) Error Std.
103.7Dummy CarPrice 1 . 0 Income 9 . 0 Price 8 . 17 6 . 493 Quantity
2
2
i i i i
^

i

where Quantity is the average petrol consumption per capita (in litre) for country i, Price
is the average petrol price (in US\$ per litre) in country i, Income is the per capita income
(in US\$) for country i, CarPrice is the average price of cars (in US\$) for country i and
Dummy is a binary variable that takes a value of 1 if country i is a developed country and
0 if country i is a developing country.

(a) Compute the value of adjusted R
2
. (4 marks)

(b) Is the error term normally distributed? Use 5% significance level. (5 marks)

(c) Does the per capita income (Income) affect the demand for petrol (quantity)
significantly? Use 5% significance level. (6 marks)

(d) According to the Law of Demand, quantity demanded and its price has a negative
relationship. Based on the above result, does the law of demand hold? Use 5%
significance level. (6 marks)

(e) Can the variation in all the independent variables explain the variation in the
dependent variable? Use 5% significance level. (6 marks)

(f) Does developed country consume more petrol or less petrol than developing country
and by how much? (4 marks)

(g) Explain under what circumstances dummy variables are used as independent
variables in regression models. (6 marks)

(h) What problem does the above estimated result suggest? Explain. (8 marks)

(i) Suppose a country has an average petrol price of US\$2.40 and average petrol
consumption per capita of 835 litre. Compute the price elasticity for this country.
(5 marks)

(Total: 50 marks)
Continued
a. 1 - (0.186(49/45) = 0.7975
b. H0: ______
HA: ______
Critical value, chi square(df=2) = _____
Test statistic, Jarque-Bera =
Decision: Reject H0, ________
c. H0: ______
HA: ______
Critical value, t(0.05, df=45) = _____ (t table, 2-tailed)
Test statistic, t = coef/s.e. =
Decision: Do not Reject H0, ________
d. H0: ______
HA: ______
Critical value, t(0.05, df=45) = _____ (t table, 1-tail)
Test statistic, t = coef/s.e. =
Decision: Do not Reject H0, ________
e. H0: ______
HA: ______
Critical value, F(0.05, df1=?, df2=?) = _____ (F table)
Test statistic, F = _____________ (formula is attached as Appendix)
Decision: ________
f. developed consume more petrol, by 103.7 litre
g. three circumstances provided in your slides, refer to Lecture 7
h. last lecture
i. elasticity = -17.8*2.4/835
= -0.0512

BEC2044 ECONOMTRICS I 15 OCTOBER 2008

KWLR/TSH Page 1 of 4

QUESTION 2

An economist is interested to investigate the relationship between economic growth
(Growth) and the openness of the economy (FreeTrade). Annual data ranging from 1961
to 2005 for a developed country was used to derive the following regression result.

3.575 Statistics d Watson - Durbin
45 Size Sample
0.614 R
FreeTrade 478 . 0 491 . 2 Growth
2
t
^

t

(a) What is first order autocorrelation? (4 marks)

(b) Using the d statistics, does the above model suffers from first order autocorrelation
problem? Use 5% significance level. (6 marks)

(c) Besides first order autocorrelation problem, what other problems do significant
Durbin-Watson d statistics indicate? (5 marks)

(d) Estimate (compute) the value of coefficient of autocorrelation (). (4 marks)

(e) Suppose the above model was re-estimated by including a lagged dependent variable
such as the following model:

t 1 - t 2 t 1 0 t

What is the implication of including a lagged dependent variable on the Durbin-
Watson d test? (6 marks)

(Total: 25 marks)

Continued
The error term has relationship with itself lagged one period.
et = p*et-1 + mt
b. H0: no auto
Ha: auto
crit. value (n=45, k=1)
DW d-test=3.575
4-dL < 3.575 < 4
Reject H0. There is negative auto
c. refer to slides of Last lecture, Lecture 11
d. rho = 1 - d/2 =
e. invalid. As a result, even though the model has autocorrelation,
the d test will still indicate that the model does not suffer from autocorrelation problem.
BEC2044 ECONOMTRICS I 15 OCTOBER 2008

KWLR/TSH Page 2 of 4

QUESTION 3

A researcher does not know the true model. Thus, he has estimated 2 models. Model 1
contains 2 independent variables, while Model 2 has 3 independent variables. The
estimated results are as follow:

(0.6) (3.1) (14.9) (25.4) Error Std.
X3 3 . 0 X2 4 . 6 X1 0 . 25 8 . 91 Y

2 Model
(2.8) (14.6) (25.1) Error Std.
X2 4 . 6 X1 9 . 24 7 . 91 Y

1 Model
2
2

(a) Based on the above estimated results, should the researcher drop X3 from Model 2?
Explain your answer in detail. (14 marks)

(b) What are the consequences of omitting a relevant variable? (11 marks)

(Total: 25 marks)

Continued

a. refer to lecture 11.
drop X3 --> is X3 significant? use t-test to check;
compare the adj R2 for Model 1 and 2
est. coefficients change in sign?
compare the std error, what do you notice?
b. refer to lecture 11 for all consequences. in summary, the model will not be BLUE but just Linear estimators ONLY.