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# Q4.

9:

A) Sample Size:

= 14 + 1

= 15

= 66042 - 65965

= 77

=k-1

=3-1

=2

## D.f of RSS = d.f (TSS) - d.f (ESS)

= 14 - 2

= 12

____

D) value of R2 and R2

R2 = ESS/ TSS

R2 = 66042 / 65965

R2 = 0.9988

## R2 = 1 - (1- R2) x (n-1)/( n-k)

= 1 - (1 - 0.9988) x (15-1)/ (15-3)

= 0.9986

E) Test the hypothesis that X2 and X3 have zero influence on Y. Which test do you use and
why?

To test the co-efficients of X2 and X3 are simultaneously 0.We should use a F test.

F = ESS/d.f (ESS)

__________

F = 65965/2

________

77/12

F = 5140.13

This F value is highly significant, leading to the rejection of the null hypothesis

F) From the preceding information, can you determine the individual contribution of X2
and X3 toward Y?

Q4.11:

## A) Interpret the regression results.

Ceteris paribus, if the BTU rating of an air conditioner goes up by a unit, the average price of
the air conditioner goes up by about 2.3 cents. Other partial slope coefficients should be
interpreted similarly. The intercept value has no viable economic meaning in the present
case.
B) Do the results make economic sense?

Yes. A prier, each X variable is expected to have a positive impact on the price.

C) At , test the hypothesis that the BTU rating has no effect on the price of an air
conditioner versus that it has a positive effect.

Degree of Freedom = n - k - 1

= 19 - 3 - 1

= 15

For 15 d.f. the 5% one-tailed critical t value is 1.753. The observed t value of 0.023 / 0.005 =
4.6 exceeds this critical t value. Hence, we reject the null hypothesis.

D) Would you accept the null hypothesis that the three explanatory variables explain a
substantial variation in the prices of air conditioners? Show clearly all your calculations.

## H0: R2 = 0 and H1 : R2 > 0. Using the F test, we obtain

F= R2/k

________

(1- R2)/d.f

F= 0.84/3

__________

(1-0.84)/ 15

F= 26.25

This F value is significant beyond the 0.01 level of significance. So, reject the null
hypothesis.
Q4.12:

A) MPC:

## Marginal Propensity to consume is the change in consumption to the changes in

income.MPC is coefficient of disposable income i.e, X2t.Thus, the

MPC is 0.93.

B) Is the MPC statistically different from 1? Show the appropriate testing procedure

t = (b2 - 1 )/ SE (b2)

t= 0.93 -1

_______

0.003734

= - 18.7466

For 73 d.f.(n-k),(76-3) this t value is highly significant. Hence reject the null hypothesis that
the true MPC is unity (Note: The se is obtained as 0.93 / 249.06 = 0.003734).

C) What is the rationale for the inclusion of the prime rate variable in the model? A priori,
would you expect a negative sign for this variable?

Since expenditure on items such as automobiles, washers and dryers, etc., is often financed,
the cost of borrowing becomes an important 5 determinant of consumption expenditure.
Therefore, the interest rate, representing the cost of borrowing, is expected to have a
negative impact on consumption expenditure.

## D) Is b3 significantly different from zero?

Yes. The t value is -3.09, which is significant at about the 0.01 level of significance (two-tailed
test).

## E) Test the hypothesis that R2 = 0.

F= R2/k

________

(1- R2)/d.f

F= 0.9996/2

_________

(1-0.9996)/73

F = 91,213.5

This F value is obviously very high, leading to the rejection of the null hypothesis that 2 R = 0.
(Note: The F value reported by the authors is different because of rounding.)

## F) Compute the standard error of each coefficient.

SE(b)= b/t

SE(b) = -10.96/-3.33

se( b) = 3.2913

SE(b1) = 0.93/249.06

se( b1 ) = 0.003734

SE(b2) = -2.09/-3.09

## se( b2) = 0.6764

Q4.18:

A) Develop a multiple regression model to explain the average starting pay of MBA
graduates, obtaining the usual regression output.

As a first pass, consider the following results obtained from EViews. The dependent variable
is average starting pay (ASP). Note: In this regression output, we present the adjusted 2 R for
the first time.

## 0.1% or lower level of significance. The percentage of employed graduates

also has a positive effect, indicating that higher demand for the graduates of

## a particular school translates into a higher salary. The 2 R value is

reasonably high.

B) If you include both GPA and GMAT scores in the model, a priori, what problem(s) may
you encounter and why?

## Since GPA and GMAT are likely to be collinear, if we introduce them

both in the model, as in (a), we would not expect both the variables to be

## individually statistically significant. This is borne out by the results given in

(a).
C)If the coefficient of the tuition variable is positive and statistically signifi- cant, does that
mean it pays to go to the most expensive business school? What might the tuition variable
be a proxy for?

## If the tuition variable is a proxy for the quality of education, higher

tuition may well have a positive impact on ASP, ceteris paribus. The results

## in (a) may support such a hypothesis.

(D)Suppose you regress GMAT score on GPA and find a statistically significant positive
relationship between the two. What can you say about the problem of multicollinearity?

## Regressing GMAT on GPA, we obtain the following EViews output:

From these results it seems that GMAT and GPA are collinear.

E)Set up the ANOVA table for the multiple regression in part (a) and test the hypothesis
that all partial slope coefficients are zero.

Source of

## Residual 1709176777 43 39748297.13

Total 12085584863 48

Total is TSS.

## Since the p value of the estimated F value is so virtually zero, we can

conclude that collectively all the slope coefficients are not equal to zero,
multicollinearity among some variables notwithstanding.

Source of

e

43

Total (∑ y2i) 48

Q4.20:

## Auction Price Age, Number of bidders 525,462.2

In all the cases the total sum of squares is 4,803,756.7. Note: The RSS can easily be obtained
from the EViews regression outputs for the above regressions. We compare the first model
that has no explanatory variables since price is regressed only on the intercept (RSSr =
4,803,756.7) with the model with all the explanatory variables (RSS = 525,462.2). Applying
the ur F formula given in this question, we obtain:

__________________

## RSSur/(n - k) ' Fm,n-k

F= (4803,756.7-525,462.2)/2

____________________

(525,462.2)/(32-3)

F = 2,139,147.25

_____________

18,119.38

≈ 118.058

This F value is about the same as in Equation (4.57), save the rounding errors.