Quiz #1 Econometrics Please read questions carefully.

The following data represent the salary of a CEO (thousands of Rs) and the return on roe equity (percentage) for a sample of firms. roe 14.1 10.9 23.5 5.9 13.8 20 16.4 16.3 10.5 26.3 salary 1095 1001 1122 578 1368 1145 1078 1094 1237 833 Answer the following questions. a) Estimate the least square regression of salary on roe. Show that the estimated regression is given by: b) c) d) e) f) g) h) i) , R2=0.053 Interpret the intercept and slope of the estimated equation. Predict the salary of a CEO whose firm has roe of 15%. Is this a valid prediction? Predict the salary of a CEO whose firm has roe of 50%. Is this a valid prediction? If roe of a company increases by 10 percentage points, by how much the CEOs salary is expected to increase? The population regression function is salary 0 1 roe u . What u represent? List any two variables you might think are included in u. Interpret R-square of the regression. Estimate elasticity of salary with respect to roe at the sample average values of roe and salary. What this elasticity show? A student argues that as firm return on equity increases the CEO are compensated for that but for sufficiently high level of roe, salary may fall. Whether or not his argument is substantial, describe in symbolic form the equation that you may use to estimate this type of relationship between roe and salary. If instead of the model in a) the log-level model is fitted to the data the estimated relationship is found to be as follows: Interpret the slope coefficient.

j)

(log represents natural log i.e. ln) k) If instead of the model in a) the log-log model is fitted to the data the estimated relationship is found to be as follows: Interpret the slope coefficient.

(x
i 1 n

x )( y i y )
i

n x i y i ( xi )( y i ) n x ( x i )
Y X X Y
2 i 2

0 y 1 x

(x
i 1

x)2

Elasticity at po int ( X , Y )

Quiz #1 Econometrics Please read questions carefully. The following data represent the wage (dollars per hour) and the number of years of schooling edu for a sample of persons in labor force. edu 11 12 11 8 12 16 18 12 12 17 wage 3.1 3.24 3 6 5.3 8.75 11.25 5 3.6 18.18 Answer the following questions. a) Estimate the least square regression of wage on edu. Show that the estimated regression is given by: , R2=0.574 b) Interpret the intercept and slope of the estimated equation. c) Predict the wage of a person who has 15 years of education. Is this a valid prediction? d) Predict the wage of a person who has 22 years of education. Is this a valid prediction? e) If edu of a person increases by 7 years, by how much the persons wage rate is expected to increase? f) The population regression function is wage 0 1 edu u . What u represent? List any two variables you might think are included in u. g) Interpret R-square of the regression. h) Estimate elasticity of wage with respect to edu at the sample average values of edu and wage. What this elasticity show? i) A student argues that as a persons education increases he is compensated by a higher wage rate but for sufficiently high level of education, wage may fall. Whether or not her argument is substantial, describe in symbolic form the equation that you may use to estimate this type of relationship between edu and wage. j) If instead of the model in a) the log-level model is fitted to the data the estimated relationship is found to be as follows: Interpret the slope coefficient. (log represents natural log i.e. ln) k) If instead of the model in a) the log-log model is fitted to the data the estimated relationship is found to be as follows: Interpret the slope coefficient.

(x
i 1 n

x )( y i y )
i

n x i y i ( xi )( y i ) n xi2 ( x i ) 2
Y X X Y

0 y 1 x

(x
i 1

x)2

Elasticity at po int ( X , Y )