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Econ122BProblemSet2Name(Piint)______________________
Bue in class Feb 6 UCIID_____________________________

MultipleChoiceQuestions(Choose the best answei, anu biiefly explain youi
ieasoning.)

1. Assume we have a simple lineai iegiession mouel:
Incomc = o +[ - BHI + u. uiven a ianuom sample fiom the population, which of
the following statement is tiue.

a. 0LS estimatois aie biaseu when BMIuo not vaiy much in the sample.
b. 0LS estimatois aie biaseu when the sample size is small (say 2u obseivations).
c. 0LS estimatois aie biaseu when the eiioi ucaptuies peiseveiance anu self
contiol, anu you believe that people who aie peiseveiant anu have moie self
contiol aie less likely oveiweight.
u. None of the above.





2. Suppose you aie inteiesteu in the effect of class attenuance on college
peifoimance, anu plan to estimate the following mouel:
col0PA = o + [ - skippcJ +u, wheie colGPA is cuiient uPA anu skipped is the
aveiage numbei of classes skippeu pei week. Bue to lack of infoimation, stuuents
motivation is omitteu fiom the iegiession. Assume that moie motive stuuents aie
less likely skip classes. 0LS estimatoi of the coefficient foi skipped will most likely

a) be biaseu away fiom zeio, so that the impact of skipped on colGPA is
oveiestimateu.
b) be biaseu towaiu zeio, so that the impact of skipped on colGPA is unueiestimateu.
c) be unbiaseu.
u) be biaseu, but not enough infoimation to ueteimine if the impact is
oveiestimateu oi unueiestimateu.





Questions SS aie baseu on the following infoimation:
Consiuei the following population mouel foi householu spenuing on foou:
ooJ = o +[
1
- inc + [
2
- bbsizc + u, wheie food is foou expenuituie in uollais,
inc is income, educis the euucation level of householu heau, hhsize is the size of a
householu.

2

S. Suppose a ieseaichei estimates this mouel, one can
a) be ceitain that the R
2
is gieatei than 1
b) be ceitain that the R
2
is equal to u
c) be ceitain that the R
2
is between u anu 1
u) be ceitain that the R
2
is equal to 1





4. Suppose that the vaiiable foi foou expenuituie is measuieu with eiiois, so food =
food_c + e, wheie foodis the mismeasuieu vaiiable, food_cis the tiuefood
expenditure,e is the measuiement eiioi inuepenuent of alltheothervariables. We
woulu expect that:
a) 0LS estimatois foi the coefficients will all be biaseu
b) 0LS estimatois foi the coefficients will all be unbiaseu
c) all the stanuaiu eiiois will be biggei than they woulu be without the
measuiement eiioi
u) both b) anu c)





S. Suppose the uata weie collecteu thiough a telephone suivey, anu the last 4 uigits
of the householus telephone numbei was acciuentally coueu as something else anu
incluueu in the iegiession. Benote the coefficient as
3
.We woulu expect
a) the 0LS estimatois
1 2 3

, , and aie all biaseu.
b) 0LS estimatoi
3

is invaliu, but
1 2

, and are valid.
c) the 0LS estimatois
1 2

, and aie unbiaseu, anu R
2
will get laigei.
u) the 0LS estimatois
1 2

, and aie unbiaseu, anu R
2
will not change.




6. You have to woiiy about peifect collineaiity in the multiple iegiession mouel
because
a) many economic vaiiables aie peifectly coiielateu.
b) the 0LS estimatoi cannot be computeu in this situation.
c) in ieal life, economic vaiiables change togethei all the time.
u) with peifect collineaiity, R
2
is equal to 1.
3



7. Suppose a ieseaichei is inteiesteu in the impact of onthejob tiaining on
piouuctivity, anu plans to estimate the following mouel:
proJ = o + [ - troining +u, wheie prod is a measuie of laboi piouuctivity, anu
trainingiepiesents numbei of houis a woikei has spent in a tiaining piogiam. The
ieseaichei believes that less efficient oi less able woikeis tenu to spenu moie time
on tiaining. If this is tiue, then 0LS estimates of this mouel will most likely
a. be biaseu, because training is coiielateu with efficiency/ability, which is in the
eiioi teim.
b. be unbiaseu if using a laige enough sample.
c. be biaseu, because the vaiiance of efficienc/ability uepenus on training.
u. be unbiaseu, as long as both prod anu training aie iecoiueu coiiectly.





8. Suppose you have the following estimateu equation,
Burgcr = Suu - 84 - log (pricc),

wheie Burger iefeis to weekly numbei of buigeis
solu on aveiage in In&InBurger joint anu piice is in 0S uollais. What woulu be youi
estimate of the slope if priceweie in uB pounus (assuming 1 uB pounu = 2 0S
uollais) ANB you use uaily numbei of buigeis solu iathei than weekly.

a. 12
b. 84
c. 168
u. 24





9. 0sing uata on 4,1S7 college stuuents, the following equation was estimateu by
0LS:
col0PA

= 1.S92 - u.u1SS - bspcrc +u.uu148 - SAI

n = 4,1S7, R
2
= u.27S
wheie colGPA is measuieu on a fouipoint scale, hsperc is the peicentile in the high
school giauuating class (uefineu so that, foi example, hsperc= S means the top S%
4

of the class), anu SAT is the combineu math anu veibal scoies on the stuuent
achievement test.
1) Bow woulu you inteipiet the estimateu slope foi hsperc.


2) Bow woulu you inteipiet the R
2
.

S) Suppose that two high school giauuates, A anu B, giauuateu in the same
peicentile fiom high school, but Stuuent As SAT scoie was 14u points
highei (about one stanuaiu ueviation in the sample). What is the
pieuicteu uiffeience in college uPA foi these two stuuents.



4) Boluing hsperc fixeu what uiffeience in SAT scoies leaus to a pieuicateu
colGPA uiffeience of .Su, oi onehalf of a giaue point.





1u. A ieseaichei has uata foi SS states uata on soua taxes anu obesity iate
(peicentage of people who aie obese), Soua taxes measuieu in cents, anu estimates
the following iegiession (Note that log value of soua tax is useu as the inuepenuent
vaiiable). Stanuaiu eiiois aie in paientheses.
0bcscRotc

= 2S.6 - u.uuS - log (SoJoIox)

(1u.u) (u.uu2)
R
2
= u.uS

Suppose Soua taxes weie measuieu in uollais insteau of cents,
1) What woulu be the estimateu coefficient of log(SodaTax).



2) What woulu be R
2
.


5


S) R
2
= u.uS in the above estimateu iegiession, how woulu you inteipiet it.





Stock anu Watson: Chaptei 4
4.1 (u.) 4.S(b. c.)






Computerexercise:
0se the uata in wage2.wf1 to stuuy how ones euucation level affects wages. Foi
concieteness, estimate the mouel: wogc = o +[ - cJuc + u, wheie wageis
monthly eainings in uollais anu educisyearsofschooling.
(1) Wiite uown the estimateu iegiession equation, along with the stanuaiu
eiiois of the coefficient estimates, as well as R
2
.
(2) If educincieases by 1 yeai, how much is wage estimateu to inciease.
(S) 0se wage in thousanus of uollais insteau of uollais, anu ieestimate the
mouel. What happens to the slope anu inteicept estimates. What happens to
the stanuaiu eiiois of these estimates. What happens to the R
2
.