Spring 2016

ECON 5340 Applied Econometrics Exam #1

True or False. Five points per question: 2 pts for a correct T/F and 3 pts for the explanation.

1. The regression line always go through the sample means.

2. If 2 and 3 are correlated, the OLS estimates of 2 and 3 are inefficient (i.e., not the Best
linear unbiased estimators).

3. The model = 1 exp(2 ) satisfies the linearity Classical assumption.

4. Assume the regression model is = 1 + 2 + , where 1 = 0. The OLS estimate 2 and

its associated standard error will be identical whether or not an intercept is included.

5. There is an inverse relationship between the size of a test and the probability of a Type I error.
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#6. (35 pts) Consider the sample: = (2, 6,2,2) ; = (3,1,2,0); = (2,0,3, 5) and the
regression model: = 1 + 2 + 3 + . Calculate the correlation between and .
Calculate the OLS estimates of 1, 2, and 3. Draw a partial regression graph in (, ) space
showing the conditional data points and fitted regression line. Carefully label the axes, sample
points and regression line. Below the first graph, draw a similar unconditional figure that does
not control for . Comment on the differences.
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#7. (40 pts) Consider three different age-earnings regressions on = 50 individual workers,
where the dummy variable, , indicates workers over 55 years old. OLS results are attached.

MODEL #1. = 1 + 2 + 2 2 +

MODEL #2. = 1 + 2 + 3 + 4 ( ) +

MODEL #3. = 1 + 2 + 3 ( 55) +

a) (10 pts) Comment on the estimated relationship between and using the OLS results
from Model #1. Sketch the fitted regression line and describe how to test that the marginal
effect is zero at the mean age.

b) (10 pts) Using Model #2, perform a statistical test that wages are higher on average after age 55.
Sketch the fitted regression line and describe how to test the hypothesis that wages are linearly
related to age (i.e., unrelated to ).
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c) (10 pts) Provide an economic interpretation of the estimation results from model #3. Sketch
the fitted regression line and perform a test that wages are linearly related to age.

d) (10 pts) Specify a spline regression model with two kinks, one at age 40 and one at age 60. How
would you interpret the resulting coefficient estimates?
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Table 1. Estimation Results from Model #1

Source | SS df MS Number of obs = 50
-------------+------------------------------ F( 2, 47) = 4.77
Model | 596.731359 2 298.365679 Prob > F = 0.0130
Residual | 2941.12083 47 62.5770389 R-squared = 0.1687
-------------+------------------------------ Adj R-squared = 0.1333
Total | 3537.85218 49 72.201065 Root MSE = 7.9106

------------------------------------------------------------------------------
wage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | 1.152868 .6722713 1.71 0.093 -.1995676 2.505303
age^2 | -.0105736 .0079512 -1.33 0.190 -.0265694 .0054222
_cons | -15.00083 13.43055 -1.12 0.270 -42.0196 12.01795

Table 2. Estimation Results from Model #2

Source | SS df MS Number of obs = 50
-------------+------------------------------ F( 3, 46) = 5.67
Model | 955.355759 3 318.45192 Prob > F = 0.0022
Residual | 2582.49643 46 56.1412266 R-squared = 0.2700
-------------+------------------------------ Adj R-squared = 0.2224
Total | 3537.85218 49 72.201065 Root MSE = 7.4927

------------------------------------------------------------------------------
wage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
old | 139.9542 97.9203 1.43 0.160 -57.14916 337.0575
age | .4723449 .1201611 3.93 0.000 .2304732 .7142167
age*old | -2.492115 1.620388 -1.54 0.131 -5.753787 .7695581
_cons | -4.836445 4.616332 -1.05 0.300 -14.12864 4.455748

Table 3. Estimation Results from Model #3

Source | SS df MS Number of obs = 1000
-------------+------------------------------ F( 2, 997) = 80.06
Model | 6717.22094 2 3358.61047 Prob > F = 0.0000
Residual | 41825.6966 997 41.9515512 R-squared = 0.1384
-------------+------------------------------ Adj R-squared = 0.1366
Total | 48542.9175 999 48.591509 Root MSE = 6.477

------------------------------------------------------------------------------
wage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | .2446299 .0202088 12.11 0.000 .2049733 .2842865
old*(age-55) | -.6353309 .159904 -3.97 0.000 -.9491178 -.321544
_cons | 2.690482 .7339792 3.67 0.000 1.25016 4.130803