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Econometrics_Review Questions

Review questions of economics

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isaiahmpapi
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19 views

Econometrics_Review Questions

Review questions of economics

Uploaded by

isaiahmpapi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Question One

i. Explain the key assumption and procedures of the Durbin-Watson test and B-G
tests.
ii. What are the key differences of the two tests.
iii. As an expert in econometrics, what would do when you find the D-W statistics is
significant?
iv. Explain the ordinary least squares (OLS) method. What do you understand by the
statement that OLS estimators are “BLUE”?
v. Explain the type of criteria you would employ to evaluate the regression results.
vi. Explain what do you understand by a statistical test of an hypothesis. With
specific example discuss how you would carry out a test of parameter
significance.
Question Two

(a) Explain intuitively why weighted least squares yield more efficient parameter
estimators than ordinary least squares when the error term is known to be
heteroscedastic.
(b) You are estimating the relationship between firms’ sales and advertising
expenditures in an industry. It becomes apparent to you and that half the firms in
the industry are large relative to the other half, and you are concerned about the
proper estimation technique in such a situation. Assume that the error variances
associated with the large firms are twice the error variances associated with the
small firms.
(i) If you used ordinary least squares to estimate the regression of
sales on advertising (assuming that advertising is an independent
variable, uncorrelated with the error term), would your estimated
parameters be unbiased? Consistent? Efficient?
(ii) How might you revise the estimation procedure to eliminate or to
resolve your difficulties?
(iii) Can you test whether the original error variance assumption is valid?

Question Three

a) You are a data analyst working for a real estate company. Your task is to develop a
model to predict house prices based on various features. You decide to use a
multiple linear regression model for this purpose. The features you consider include

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the size of the house (in square feet), the number of bedrooms, the number of
bathrooms, the age of the house, and the distance to the nearest city center.

After running your regression analysis, you notice that the coefficients of some
variables behave erratically, showing signs of instability when you slightly modify the
model. For instance, the coefficient of the number of bedrooms sometimes becomes
negative, which is counterintuitive. You also observe that the standard errors for the
coefficients of the number of bedrooms and the size of the house are quite large.

Based on the scenario described, answer the following questions:

i. What is the likely econometric problem occurring in this regression model?


Explain your reasoning.

ii. How might you verify if this problem exists in your model?

iii. Suggest two potential ways to address this problem in your analysis.

b) Is multicollinearity really a problem?

Question Four

(a) What is the nature of autocorrelation?


(b) What are the theoretical and practical consequences of autocorrelation?
(c) Since the assumption of no autocorrelation relates to the unobservable
disturbances 𝜇 how does one know that there is autocorrelation in any given
situation?
(d) How does one remedy the problem of Heteroscedasticity?

Question Five

Consider the following linear regression model:

Yi = β1 + β2Xi,2 + β3Xi,3 + εi

a) Explain how the ordinary least squares estimator for 𝛽 is determined and derive
an expression for all the b’s.
b) Which assumptions are needed to make b an unbiased estimator for 𝛽 ?
c) Explain how one can test the hypothesis that 𝛽 3 = 1

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d) Explain how one can test the hypothesis that 𝛽 2 + 𝛽 3 = 0
e) Suppose that Xi,2= Xi,3 + μi, where μi, and Xi,3 are uncorrelated.
i. If Xi,2 is used as specified above, which econometrics problem is likely to
occur.
ii. Then, suppose that the model is estimated with μi, included rather than Xi,2.
How are the coefficients in this model related to those in the original
model? And the 𝑅 2s?

Question Six

Using sample of 545 full time workers in Tanzania, a researcher is interested in the
question as to whether women are systematically underpaid compared with men. First
she estimates the average hourly wages in the sample for men and women, which are
Tshs 5910 and Tshs 5090 respectively.

a) Do these numbers give an answer to the question of interest? Why or why not?
How could one (at least partially) correct for this if there is a need of doing that.

The same researcher also runs a simple regression of an individual’s wage on a male
dummy, equal to 1 for males and 0 for females. This gives the results reported in the
Table below

Table 1: Hourly wages explained from gender: OLS results


Variable Estimate Standard Error t-ration

Constant 5.09 0.58 8.78


Male 0.82 0.15 5.47

N = 545 s = 2.17 𝑅 2 = 0.26

b) How can you interpret the coefficient estimate of 0.82? How do you interpret the
estimated intercept of 5.09?
c) How do you interpret the 𝑅 2 of 0.26?
d) Explain the relationship between the coefficient estimates in the Table and the
average wage rates of males and females.
e) Having looked at the table and the model you are unhappy with this formulation
of the model as ‘a female dummy is omitted from the model’. Comment upon

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this criticism.
f) Test using the above results, the hypothesis that men and women have, on
average the

ION:

g).State and explain the classical linear Regression assumption. List at least 5
assumptions.

h). Consider the simple Linear Regression Model; Yi = 𝛼 + 𝛽 Xi + ei where i = 1,2,… ,


n.Yi is the explained variable and Xi is the explanatory variable, ei is an error term. 𝛼
and 𝛽 are parameters to be estimated. Derive the OLS estimate using ordinary least
square method.

i). Prove that the OLS estimate 𝛽 is the best linear Unbiased estimator (BLUE), that
is 𝐸 (𝛽 ℎ𝑎 𝑡 ) = 𝛽 .

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