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BEA 242 Introduction to Econometrics Group Assignment (Updated on 10 May 2012: the change in highlighted)

Your group assignment must be submitted to the box marked BEA242 on level 4, Foyer Area, Commerce Building. All work must have the School of Economics and Finance Assignment Cover Sheet attached. The cover sheet is available on the unit page on MyLo. You must submit the assignment by 4.00pm on Friday 25 May 2012. Read instructions before attempting the assignment.

Instructions
Each group consists of 1-3 students. Each group completes and submits ONE assignment as a group work and all group members will gain the same grade. It is each group's responsibility to allocate the share of work. It is highly recommend that all group members outline solutions individually before group meeting and work out the details in the meetings. Attach a summary of your Eviews output in the end of your assignment. Your answer must be readable without reference to the Eviews output, but you should highlight those parts of your output that you explicitly use in your answers. Answers must be in sentence form so that single word or single number answers without explanation will be considered incomplete. Explain all hypothesis tests in full detail, meaning A. Statement of the null and alternative hypotheses B. Values of test statistics and the formula used to calculate it C. Distribution of the test statistics D. Significance level of the test E. Statement of rule used to reject/accept null hypothesis F. Conclusion of test expressed in terms of the economic model

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Question 1 To answer this question, you use Eviews. The data set nbasal.wf1 contains salary information and career statistics for 269 players in the National Basketball Association (NBA). The data series in this data set are: wage = annual salary (thousands $) age = age in years exper = years as professional player points = points per game coll = years played in college marr = dummy variable, 1 if individual if player is married; 0 otherwise Estimate a model relating points-per-game (points) to years in the league (exper), age, and years played in college (coll), i.e.,

pointsi = 0 + 1exper + 2 age + 3coll + ei


(a) Report your estimation results in a suitable concise form. (b) Interpret the estimate coefficients of exper and coll, while paying attention to the units of measurement. Also comment on whether these estimated coefficients have the expected sings. (c) How well does the model fit the data? Use the R2 to explain. (d) Test the overall significance of the regression at the 5% level of significance. (e) Add the variable marr to the model and test the null hypothesis that this additional variable is statistically insignificant at the 5% level of significance. What do you conclude? Now estimate the following two models:

wagei = 0 + 1 points + 2exper + 3exper 2 + 4 age + 5coll + ei (Model 1) ln( wagei ) = 0 + 1 points + 2 exper + 3exper 2 + 4 age + 5coll + ui (Model 2)
(f) Can we use the R2 or adjusted R2 to determine which model is preferable between Model 1 and Model 2? Why or why not. Explain. (g) Test whether age and coll are jointly significant in Model 2. What do you conclude?

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Question 2 To answer this question, you use a hand calculator or Excel. Consider the multiple regression model:

yi = xi11 + xi 2 2 + xi 3 3 + ei
with the six observations on yi , xi1 , xi 2 and xi 3 given in the following table:
yi 1 2 3 -1 0 1 xi1 1 1 1 1 1 1 xi2 0 1 2 -2 1 1 xi3 1 -2 1 0 -1 1

(a) Calculate the observations in terms of deviations from their means. That is, find: 1) xi*2 = xi 2 x2 2) 3)

xi*3 = xi 3 x3 yi* = yi y .

(b) Calculate: 6 1) i =1 yi* xi*2 2) 3) 4) 5)

6 *2 i =1 i 2 6 * * i =1 i i 3

yx

*2 i =1 i 3 6 * * i =1 i 2 i 3

x x .

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(c) Using the following expressions for the least square estimates, calculate estimates of 1 , 2 and 3 .

1 = y 2 x2 3 x3
2

( y x )( x ) ( y x )( x = ( x )( x ) ( x x )
* * i i2 *2 i3 * * i i3 *2 i2 *2 i3 * * i 2 i3 2

* * i 2 i3

( 3 =

yi* xi*3 )( xi*2 ) ( yi* xi*2 )( xi*2 xi*3 ) 2

( x )( x ) ( x
*2 i2 *2 i3

* * 2 i 2 i3

(d) Find the estimate of the error variance 2 .


(e) Find the standard error for 2 .
(f) Test the null hypothesis H 0 : 2 = 1 against the alternative that H1 : 2 1 . *********************************

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