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University of Rochester
Fall 2008
Homework: Chapter 9
Text Problems: 9.1, 9.5, 9.10, 9.12, 9.15
9.1.
Therefore the
(a) True.
dY X
d ln Y
(b) True. For the two-variable linear model, the slope equals B2
and
X
X
= B2
, which varies from
Y
Y
Y
, which
X
varies from point to point while the elasticity equals B2 . This can
be generalized to a multiple regression model.
(c) True. To compare two or more R 2s , the dependent variable
must be the same.
(d) True. The same reasoning as in (c).
(e) False. The two r 2 values are not directly comparable.
9.10.
(d) The demand for coffee is price inelastic, since the absolute value
of the two elasticity coefficients is less than 1.
(e) Antilog (0.7774) = 2.1758. In Model B, if the price of coffee
were $1, on average, people would drink approximately 2.2 cups of
coffee per day. [Note: Keep in mind that ln(1) = 0].
(f) We cannot compare the two r 2 values directly, since the
dependent variables in the two models are different.
9.12.
The
(a)
1
= 0.0130 + 0.0000833 X i
Yi
t = (17.206)
(5.683)
r 2 = 0.8015
The slope coefficient gives the rate of change in mean (1 / Y) per unit
change in X.
(b)
dY
B2
dX
( B1 B2 X i ) 2
dY X
coefficient is -0.1915.
1
Xi
= 55.4871 + 112.1797
(d) Y
i
t = (17.409)
(4.245)
r 2 = 0.6925
(e) No, because the dependent variables in the two models are
different.
(f) Unless we know what Y and X stand for, it is difficult to say
which model is better.
Other Problems:
1. For each of the following scenarios write out the functional form of the regression
model you would use.
a. Suppose X is the price of apples and Y is the quantity of apples and you want to
calculate the own price elasticity.
lnYi = B1 + B2lnXi + ui
b. Suppose X represents expenditures on pollution reduction and Y represents the level
of emissions, (which will never fall all the way to zero).
Yi = B1 + B2(1/Xi) + ui
c. Suppose you want to calculate the compound growth rate of income, Y.
lnYi = B1 + B2t + ui
d. Suppose you think the growth rate of income, X, has an effect on the level of the stock
market, Y.
Yi = B1 + B2lnXi + ui
e. Suppose X is the quantity of labor and Y is the quantity of capital and you want to
calculate the elasticity of substitution between capital and labor.
lnYi = B1 + B2lnXi + ui
2. Use the data Wage and Experience which contains information on the wage,
educational attainment (number of years of education) and experience (number of
years on the job) for 526 individuals, from the course website.
a. Use OLS to estimate the regression equation and report the results in the
appropriate format:
wagei b1 b2 edu b3 exp i b4 exp i2 ei
SUMMARY
OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.519
0.269
0.265
3.166
526
ANOVA
df
Regression
Residual
Total
Intercept
Education
Experience
Experience^2
3
522
525
SS
1927.877
5232.538
7160.414
Coefficient
s
-3.965
0.595
0.268
-0.005
Standard
Error
0.752
0.053
0.037
0.001
MS
642.626
10.024
t Stat
-5.271
11.228
7.271
-5.611
F
64.109
Significance
F
0.000
Pvalue
0.000
0.000
0.000
0.000
Each additional year on the job increase the average hourly wage by $0.27.
A one unit increase in experience squared decreases the average hourly wage
by less than $0.01
c. Set up and test the appropriate hypothesis to determine if exp2 statistically
significant at the 1% level (two-sided)?
The t-critical value is 2.576 therefore reject H0
d. Set up and test the joint hypothesis that all slope coefficients are equal to
zero at the 5% level of significance.
F-critical value is 2.60, therefore reject H0
e. At what value of exp does additional experience actually lower the
predicted wage?
wagei b1 b2 edu b3 exp i b4 exp i2 ei
Take the derivative with respect to exp and set equal to zero. Solve for exp.
wage
b3 2b4 exp 0
exp
exp
0.268
26.8
2 * 0.005
Which means that after 26.8 years experience has a negative impact on wage.