3740 Introduction to Econometrics, Fall 2010 1

Sample Final Exam 3740

Fall 2010
Prof. L. Grogan

2 hours.

Show all work. Label all diagrams and explain them.

1. You estimate the following equation:

M!
SATi = β!0 + β!1 ∗ GP Ai + β!2 ∗ F EM ALEi + β!3 ∗ GP AF EMi + ...controls + "i

Show in a diagram and explain the relationship between grade point average (GPA) and
medical school admissions test score (MSAT) for females (FEMALE) and males, where
GPAFEM is the interaction term between GPA and FEMALE. Explain and label your
diagram. [5 marks].

2. Suppose you have 50 years of quarterly data for one product, and impose that the
demand for the product is a linear function of price, income, quarter, and year.

You wish to test the null hypothesis that ceteris paribus, demand is the same in all
years, after controlling for quarter of year (seasonality), price and income. What are the
degrees of freedom for the F-test in this case? [2 marks].
3740 Introduction to Econometrics, Fall 2010 2

3. Explain the main difference between pure and impure serial correlation. What im-
plication does this difference have for attempts to remedy the serial correlation problem?
[3 marks].

4. When would one use a White test rather than a Park test to test for heteroscedas-
ticity? [2 marks]
3740 Introduction to Econometrics, Fall 2010 3

5. Simple regression model (1 explanatory var): Show in a diagram the relationship

between actual and predicted values in the case that TSS=ESS. [2 marks]

6. Explain the Gauss-Markov Theorum and the Classical Assumptions behind using
OLS regression. [6 marks]
3740 Introduction to Econometrics, Fall 2010 4

7. You run a regression explaining wages in Canada as a function of years of educa-

tion (EDUC), years of work experience (EXP), and whether or not an individual is an
immigrant (IMMIG). You obtain the following regression results:

!
ln(W AGEi ) = 200 + .09 ∗ EDU Ci + .07 ∗ EXPi − 0.20IM M IGi (1)

a. If you had used immigrants rather than the native-born (NBORN) as a reference
group, what value would the coefficient on the new dummy variable NBORN take? [1
mark]

b. You are debating whether or not to use the above regression, or the following
regression as the main results discussed in your project report.

W!
AGE = 3200 + 1.23 ∗ EDU Ci + 2.71 ∗ EXPi − 3.00IM M IGi (2)

What statistic should you use in order to choose which of the above regressions provides
the best fit to the data? [1 mark]

8. We estimate a regression to explain the determinants of house sale prices in the Toronto
area between 2000 and 2006. After estimating by OLS, we obtain our results and a Durbin-
Watson statistic of 0.07. What procedures should we follow to ensure that our hypotheses
tests are made using the right t-statistics? [5 marks].
3740 Introduction to Econometrics, Fall 2010 5

9. You run a regression using four explanatory variables. Your R̄2 is very high, at 0.99,
but the t-statistics suggest that none of the explanatory variables are statistically signif-
icant at the 5% level, using a 2-tailed t-test. What type of problem might you suspect?
What might you do to solve it? [2 marks]

10. You first run the following regression, explaining yearly wages of individuals in South-
ern Ontario as a function of their education (EDUC), work experience (EXP), and whether
or not they reside in Toronto (TOR).

W!
AGEi = 33120 + 143 ∗ EDU Ci + 298 ∗ EXPi + 345 ∗ T ORi + "i (3)

You decide to transform your WAGE variable so that it is measured in thousands of

dollars per year. How would this affect the coefficient values in the above regression? Your
goodness-of-fit statistics? The statistical significance of your coefficients? [3 marks]

11. Explain what the Confidence Interval (CI) means in words. [1 mark]
3740 Introduction to Econometrics, Fall 2010 6

12. A manufacturer must recall several models of a product due to problems not dis-
covered in its random final inspection process. What type of error is this an example of?
[1 mark]

13. What does the statement“, robust” in the STATA command “reg y x, robust” do?
What are the implications of using this command for coefficients and standard errors [2
marks]

14. What attractive interpretation does the double-log functional form have for economists?
[1 mark].

15. Name the most important criteria for the inclusion of an explanatory variable in
a regression equation. [1 mark].
3740 Introduction to Econometrics, Fall 2010 7
3740 Introduction to Econometrics, Fall 2010 8

16. Explain the implications of omitted variable bias for our included coefficients and
standard errors. [2 marks].

17. You estimate the following regression explaining the relationship between a per-
son’s height above 5 feet in inches (HEIGHT) and weight in pounds(WEIGHT), using a
sample of individuals with heights in the range 5 to 7 feet tall.

! i = 100.4 + 0.5 ∗ HEIGHTi + 0.5 ∗ M ALEi

W EIGHT (4)

a. Predict the weight in pounds of a female of height 5 foot 7 inches. [1 mark]

b. Predict the weight in pounds of a male of height 7 foot 9 inches. [1 mark]

3740 Introduction to Econometrics, Fall 2010 9

18. What is the interpretation of the β1 coefficient in the following two cases? Note
that EDUC refers to years of education, LOGINC refers to the log of years of income and
LOGEDUC refers to the log of years of education.[2 marks].

a.

! Ci = β!0 + β!1 ∗ EDU Ci + controls....

LOGIN

b.

!
IN Ci = β!0 + β!1 ∗ LOGEDU Ci + ...controls

19. You estimate a regression explaining wages in Canada using the full data set from the
most recent Canadian Census of the Population. Although your R̄2 statistic is ‘only’ 0.3,
all of your regressors are statistically significant at the 1% level. Why? [2 marks].

20. Explain the Cochrane-Orcutt method of estimating Generalised Least Squares (GLS)
in the case of serial correlation. [4 marks]

21. You have the following theory about the determinants of income amongst working
women in Canada. EDUC refers to years of education, LOGINC to log of yearly income,
EXP to labour market experience, and NOKIDS to the number of children a woman has.

LOGIN Ci = β0 + β1 ∗ EDU Ci + β2 ∗ EXPi + β3 ∗ N OKIDSi + "i

You find run this regression and, surprisingly, obtain a β!3 which is positive and statis-
tically significant. Discuss potential reasons for this finding and what you might do to
convince yourself and other researchers of these surprising results. [3 marks]

22. What is the relationship between the P-value and the t-statistic? [2 marks]
3740 Introduction to Econometrics, Fall 2010 10

23. Explain multicollinearity and its’ implications for regression coefficients and stan-
dard errors. [3 marks]
24. Explain why fourth order serial correlation might be present in time series data
where Ys and Xs are measured in quarters of years. [2 marks]