ASSIGNMENT 2011 Question 1

QMT

732

(ECONOMETRICS)

Data on three-variable problem yield the following results:

33 0 0 X ' X = 0 40 20 0 20 60

132 X ' y = 24 92

(Y Y )

= 150

a) What is the sample size? = 33

1 X 1.1 X 2.1 1 X 1.2 X 2.2 X = . 1 X 1.33 X 2.33

1 X ' = X 1.1 X 2.1

1 X 1.2 X 2.2

.
. .

1 X 1.33 X 2.33

1 X ' X = X 1.1 X 2.1 33 0 0 0 40 20 0 20 60

1 X 1.2 X 2.2
3x33

.
. .

1 X 1.1 X 2.1 1 1 X 1.2 X 2.2 X 1.33 . X 2.33 1 X 1.33 X 2.33

33x3

1 + 1 + 1 + 1... X'X =

b) Compute the regression equation.

33 0 0 X ' X = 0 40 20 0 20 60

1 / 33 1 / 0 1 / 0 (X' X) = 1 / 0 1 / 40 1 / 20 1 / 0 1 / 20 1 / 60

0.03 0.00 0.00 = 0.00 0.03 0.01 0.00 0.01 0.02

0.03 ( X ' X ). X ' Y = 0.00 0.00

0.00 0.03 0.01

3x3

0.00 132 0.01 24 0.02 92

3x1

4 OLS = 0.2 1.6

Therefore Y = 4 0.2X + 1.6X

c) Estimate the standard error of b2 and test the hypothesis that 2 is zero

As we know, TSS = ESS + RSS

Given TSS =

(Y Y )

= 150

ESS = (b. XY)

0.2 b = 1.6

b ' = [ 0 .2

1 .6 ]

ESS = b'.X ' Y = [ 0.2

24 1.6] . = 142.40 94

TSS = ESS + RSS

RSS = 150 142.40 = 7.6 aka ee

S = ee/(n-k),

S.E = ee/(n-k) = 7.6/30 = 0.503322 v(b1) s(b1) == ) s(b2 S.E = ) s(b3 =

0.01 v (b) = 0.00 0.00

0.00 0.01 0.00

0.00 0.00 0.01

== ) v(b2 variance = ) v(b3 =

0.01 0.01 0.01

0.09 0.09 0.07

Test hypothesis, H0 : B = 0 tcal = T/2,n-k = T0.025,30 2.294157 2.042 Reject H0

Since tcal > ttable, we reject the hypothesis, H0 : B = 0

d) Test the same hypothesis by running the appropriate restricted regression and examining the difference in the residual sums of squares

As we know, Y = 4 0.2X + 1.6X

TSS = ESS + RSS

ESS = 142.4

New TSS = 98.4

Therefore RSS = -44

e) Compute a conditional prediction for Y f given x2 f = 4 and x3 f = 2 . Obtain also a 95 percent interval for this prediction. If the actual value of Y f turned out to be 12, would you think it came from the relationship underlying the sample data?

Y = 4 0.2X + 1.6X

1 c = 4 2
= cb

c ' = [1

2]

= [1

4 2]. 0.2 1.6

=8

95% confidence interval value of Y S.E = 0.503322

c '.( X ' X ) = [1

0.03 2].0.00 0.00

0.00 0.03 0.01 1 0.08]. 4 2

0.00 0.01 0.02

= [ 0.03

0.14

0.08]

c '.( X ' X )c = [ 0.03

0.14

= 0.75

Therefore Sqrt = 0.75 = 0.8660

The confidence interval for the value Y is f t0.025,30 c(XX)-1 c = 8 2.042(0.8660) = 8 1.7684 = 9.7684 , 6.2316 Upper 95% C.I 9.7684

Lower 6.2316

Since 12 is fall outside the range of its upper and lower limit, therefore we reject the hypothesis, H0 : Y = 12 if X2f = -4, X3f = 2

Question 2 Consider the multiple regression model: Yt = 1 + 2 X 2t + 3 X 3t + 4 X 4t + 5 X 5t + ut You would like to test the null hypothesis H 0 : 2 3 3 = 1

a) Let 2 and 3 denote the OLS estimators of 2 and 3 . Find var( 2 3 3 ) in terms of the variances of 2 and 3 , and the covariance between them.
b) Write the t-statistic for testing H 0 : 2 3 3 = 1 . What is the standard error of

2 3 3 ? c) Define 1 = 2 3 3 and 1 = 2 3 3 . Write a regression equation involving

1 , 1 , 3 and 4

Question 3 Explain the differences between the concepts of simple correlation, partial correlation and multiple correlation. Why is each useful? Concept Simple correlation Differences Measure of the degree to which two variables vary together, or a measure of the intensity of the association between two variables. Advantages -Can show that an independent variable causes a change in a dependent variable. -For example, testing the hypothesis that an association between X and Y exists -To determine if an association between two variables exists as determined using correlation Measures the degree of association -Can examine the correlations between two random variables, with the among residuals (errors of effect of a set of controlling random prediction). If regress variable X variables removed. on variable Z, then subtract X' from X, we have a residual e. This e will be uncorrelated with Z, so any correlation X shares with another variable Y cannot be due to Z. -Hold some third variable constant while examining the relations between X and Y. It can be done this by design. Basically it is a linear relationship among -The effects of all the independent more than two variables. It is measured variables simultaneously on a by the coefficient of multiple dependent variable. determination, denoted as R2, which is a -For example, the correlation comeasure of the fit of a linear regression. efficient between the yield of paddy (X1) and the other variables, viz. type of seedlings (X2), manure (X3), rainfall (X4), humidity (X5) is the multiple correlation co-efficient R1.2345 . This co-efficient takes value between 0 and +1.

Partial correlation

Multiple correlation

Question 4 The following variables are used to determine demand for roses. The quarterly data on these variables are given in Table 1. You are asked to consider the following demand functions: Y 1148 4 9348 8429 1007 9 9240 8862 6216 8253 8038 7476 5911 7950 6134 5868 3160 5872 x2 2.26 2.54 3.07 2.91 2.73 2.77 3.59 3.23 2.6 2.89 3.77 3.64 2.82 2.96 4.24 3.69 x3 3.49 2.85 4.06 3.64 3.21 3.66 3.76 3.49 3.13 3.2 3.65 3.6 2.94 3.12 3.58 3.53 x4 158.1 1 173.3 6 165.2 6 172.9 2 178.4 6 198.6 2 186.2 8 188.9 8 180.4 9 183.3 3 181.8 7 185 184 188.2 175.6 7 188 x5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Yt = 1 + 2 X 2t + 3 X 3t + 4 X 4t + 5 X 5t + ut ln Yt = 1 + 2 ln X 2t + 3 ln X 3t + 4 ln X 4t + 5 X 5t + ut

a) Estimate the parameters of the linear model and interpret the results b) Estimate the parameters of the log-linear model and interpret the results c) 2 , 3 and 4 give, respectively, the own-price, cross-price and income

elasticities of demand. What are their a priori signs? Do the results concur with the a priori expectations? d) How would you compute the own-price, cross-price and income elasticities for the linear model? e) On the basis of your analysis which model if either would you choose and why?

Question 5 To answer Question 5, you have to refer to the the log-linear model (in Question 4),

ln Yt = 1 + 2 ln X 2t + 3 ln X 3t + 4 ln X 4t + 5 X 5t + ut
a) What is the estimated own-price elasticity of demand (elasticity with respect to the price of roses)? b) Is it statistically significant? c) If so, is it significantly different from unity? d) A priori, what are the expected signs of X 3 (price of carnations) and X 4 (income)? Are the empirical results in accord with these expectations? e) If the coefficients of X 3 and X 4 are statistically insignificant, what may be the reasons?