Problem session #3

Q.1

The t-statistic is calculated by dividing

a. the OLS estimator by its standard error.
b. the slope by the standard deviation of the explanatory variable.
c. the estimator minus its hypothesized value by the standard error of the
estimator.
d. the slope by 1.96.

Q.2

If the absolute value of your calculated t-statistic exceeds the critical value from the
standard normal distribution, you can
a. reject the null hypothesis.
b. safely assume that your regression results are significant.
c. reject the assumption that the error terms are homoskedastic.
d. conclude that most of the actual values are very close to the regression line.

Q.3

Consider the following regression line: TestScore 698.9 2.28 STR . You are told that
the t-statistic on the slope coefficient is 4.38. What is the standard error of the slope
coefficient?
a. 0.52
b. 1.96
c. -1.96
d. 4.38

Q.4

One of the following steps is not required as a step to test for the null hypothesis:

a.
b.
c.
d.
Q.5

compute the standard error of 1 .

test for the errors to be normally distributed.
compute the t-statistic.
compute the p-value

Finding a small value of the p-value (e.g. less than 5%)

a. indicates evidence in favor of the null hypothesis.
b. implies that the t-statistic is less than 1.96.
c. indicates evidence in against the null hypothesis.
d. will only happen roughly one in twenty samples

Q.6
True or False. Explain
a. Best of BLUE describes maximum variance.
b. hat 2 = .50 our null hypothesis is 2 = 0 You must reject the null based on these two
facts. C
c. Our obtained (calculated) t equals 19, the beta in question is statistically not
significant?
d. The method of least squares maximizes the explained variation.

Analytical Questions
Q.1
SCENARIO: The marketing sub-committee for a consortium of dealers of American-made
luxury automobiles has hired your consulting firm to tell them about the determinants of
demand for their products. For a random sample of 17 dealerships in different
neighborhoods, you collect data on the average number of cars sold per month (carsi), the
median age of the population in the same zipcode as the dealership (agei), the median
household income (in thousands of dollars) from all sources in the same zipcode (inci),
median price of luxury cars stocked at the dealership (in thousands of dollars) (pricei),
and distance from the nearest foreign luxury car dealership (disti). The statistical analyses
you perform are given in the Exhibit below
a.
b.
c.
d.
e.

f.

Using the information under descriptive statistics and the regression

output, fill in the 7 blanks marked with XXXX under Regression 1 in the Exhibit
below.
Based on Regression 1, what is the verbal interpretation of the
estimated regression equation? Is the intercept meaningful? Why or why not?
Based upon the simple regression results the Regression 1, do cars
appear to be inferior (as opposed to normal) goods? Explain how you have reached
this conclusion.?
Based upon the simple regression results in Regression 1, does income
appear to have any significant relationship with cars? Test the hypothesis at the 5%
level.
Based on Regression 1, what level of monthly average car sold is
expected for a median household income of $50,000 in the same zipcode? Give the
formula and BUT DO NOT CALCULATE how a 95% confidence interval for this
prediction would be constructed
The chairperson for the consortium says "I took Econ 1 and I know that
demand curves slope downwards from left to right. I don't think much of your skills
as an economist if the demand curve you estimate in Regression 2 is not
characterized by a negative slope." Based upon Regression 2 in the Exhibits, is it
possible that there is a downward sloping demand curve for these cars? Explain how
you have reached this conclusion

Q.2
Consider the regression model Y = A+BX+, where Y is the aggregate investment for all
firms over a number of past periods (in billions of dollars) and X is the composite price
index of common stocks over the given period. You wish to estimate the regression based
on 50 sample data. A spreadsheet calculation with these 50 observations gave the
following results:
i = 13778.4 Yi = 1778.3
iYi = 412329.68 i2 = 4425379.14
Yi2 = 74711,37
a.

Determine the least square regression equation. (5)

b.

Calculate the proportion of investment level that is explained by the price index?
(3)

c.

Test the hypothesis that there is no significant relationship between aggregate

investment and the composite price index at the 5% level

Q.3
Given the following estimated value for the following regression (standard errors of
estimated coefficients are in brackets)
Pwidth = 2.5 - .77height
( .77) (.33)
Test the hypothesis that I think there is a direct relationship between height and Pwidth:
hint: test if B1 =1

EXHIBITS
|_* Descriptive Statistics
NAME
AGE
INC
CARS
PRICE
DIST

N MEAN
17 55.041
17 186.94
17 6.2659
17 53.941
17 11.414

ST. DEV
13.538
38.230
3.1415
2.5365
6.5447

VARIANCE
MINIMUM
MAXIMUM
183.29
29.714
70.265
1461.6
100.00
250.00
9.8688
1.7955
12.357
6.4338
49.000
59.000
42.833
2.0830
21.814

Regression 1
|_ols cars inc
R-SQUARE = XXXXX
STANDARD ERROR OF THE ESTIMATE-SIGMA = XXXXX
SUM OF SQUARED ERRORS-SSE= 86.037
MEAN OF DEPENDENT VARIABLE = XXXXX

Y 2= XXXXX
ANALYSIS OF VARIANCE SS
DF
MS
REGRESSION
71.865
1.
71.865
ERROR
86.037
15.
5.7358
TOTAL
157.90
XXXXX.
9.8688
VARIABLE ESTIMATED STANDARD T-RATIO
NAME COEFFICIENT ERROR
15 DF P-VALUE
INC
0.055436 0.01566
XXXXX
0.003
CONSTANT -4.0973
XXXXX
-1.373
0.190

|_* Regression 2
|_ols cars price
R-SQUARE = 0.1185
R-SQUARE ADJUSTED = 0.0597
VARIANCE OF THE ESTIMATE-SIGMA**2 = 9.2795
STANDARD ERROR OF THE ESTIMATE-SIGMA = 3.0462
SUM OF SQUARED ERRORS-SSE= 139.19
MEAN OF DEPENDENT VARIABLE = 6.2659
ANALYSIS OF VARIANCE - FROM MEAN
SS
DF
MS
REGRESSION
18.709
1.
18.709
ERROR
139.19
15.
9.2795
TOTAL
157.90
16.
9.8688
VARIABLE ESTIMATED STANDARD T-RATIO
NAME COEFFICIENT ERROR
15 DF P-VALUE
PRICE
0.42632
0.3002
1.420
0.176
CONSTANT -16.730
16.21
-1.032
0.318