ForStudents

SolutionstoOddNumberedEndofChapterExercises

Chapter2
ReviewofProbability
2.1.

(a) ProbabilitydistributionfunctionforY
Outcome(numberofheads)
Probability

Y0
0.25

Y1
0.50

Y2
0.25

(b) CumulativeprobabilitydistributionfunctionforY
Outcome(numberofheads)
Probability

Y0
0

0Y1
0.25

1Y2
0.75

d
(c) Y = E (Y ) (0 0.25) (1 0.50) (2 0.25) 1.00 . F Fq, .

Y2
1.0

2
2
UsingKeyConcept2.3: var(Y ) E (Y ) [ E (Y )] ,
and

(ui | X i )

sothat

var(Y ) E (Y 2 ) [ E (Y )]2 1.50 (1.00) 2 0.50.

2.3.

Forthetwonewrandomvariables W 3 6 X and V 20 7Y , wehave:

E (V ) E (20 7Y ) 20 7 E (Y ) 20 7 078 1454,
(a) E (W ) E (3 6 X ) 3 6 E ( X ) 3 6 070 72

W2 var (3 6 X ) 62 X2 36 0 21
7 56,

2
2
2

8 4084

(b) V var (20 7Y ) (7) Y 49 0 1716

(c) WV cov (3 6 X , 20 7Y ) 6 (7)cov (X , Y ) 42 0084 3528

3528
corr (W , V ) WV
04425
WV
756 84084

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2.5.

LetXdenotetemperatureinFandYdenotetemperatureinC.RecallthatY0whenX32and
Y100whenX212;thisimplies Y (100/180) ( X 32) or Y 17.78 (5/9) X. UsingKey
Concept2.3,X70oFimpliesthat Y 17.78 (5/9) 70 21.11C, andX7oFimplies
Y (5/9) 7 3.89C.

2.7.

2
2
2
Usingobviousnotation, C M F ; thus C M F and C M F 2cov( M , F ). This
implies

(a) C 40 45 $85, 000 peryear.

cov( M , F )
M F ,sothat cov ( M , F ) M F corr ( M , F ). Thus cov ( M , F )
(b)
12 18 0.80 172.80, wheretheunitsaresquaredthousandsofdollarsperyear.
corr ( M , F )

2
2
2
2
2
2
(c) C M F 2cov( M , F ), sothat C 12 18 2 172.80 813.60, and
C 813.60 28.524 thousanddollarsperyear.

(d) FirstyouneedtolookupthecurrentEuro/dollarexchangerateintheWallStreetJournal,the
FederalReservewebpage,orotherfinancialdataoutlet.Supposethatthisexchangerateise
(saye0.80Eurosperdollar);each1dollaristhereforewitheEuros.Themeanistherefore
eC(inunitsofthousandsofEurosperyear),andthestandarddeviationiseC(inunits
ofthousandsofEurosperyear).Thecorrelationisunitfree,andisunchanged.
ValueofY

1
5
8
ProbabilitydistributionofY
ValueofX

14
0.02
0.17
0.02
0.21

22
0.05
0.15
0.03
0.23

30
0.10
0.05
0.15
0.30

40
0.03
0.02
0.10
0.15

65
0.01
0.01
0.09
0.11

Probability
Distributionof
X
0.21
0.40
0.39
1.00

(a) Theprobabilitydistributionisgiveninthetableabove.
E (Y ) 14 0.21 22 0.23 30 0.30 40 0.15 65 0.11 30.15
E (Y 2 ) 142 0.21 222 0.23 302 0.30 402 0.15 652 0.11 1127.23
var(Y ) E (Y 2 ) [ E (Y )]2 218.21

Y 14.77

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(b) TheconditionalprobabilityofY|X8isgiveninthetablebelow
ValueofY
14

22

30

40

65

0.02/0.39

0.03/0.39

0.15/0.39

0.10/0.39

0.09/0.39

E (Y | X 8) 14 (0.02/0.39) 22 (0.03/0.39) 30 (0.15/0.39)

40 (0.10/0.39) 65 (0.09/0.39) 39.21
E (Y 2 | X 8) 14 2 (0.02/0.39) 22 2 (0.03/0.39) 30 2 (0.15/0.39)
402 (0.10/0.39) 652 (0.09/0.39) 1778.7

var(Y ) 1778.7 39.212 241.65

Y X 8 15.54
(c) E ( XY ) (1 14 0.02) (1 22 : 0.05) L (8 65 0.09) 171.7
cov( X , Y ) E ( XY ) E ( X ) E (Y ) 171.7 5.33 30.15 11.0
corr( X , Y ) cov( X , Y )/( X Y ) 11.0 / (2.60 14.77) 0.286

2.11.

(a) 0.90
(b) 0.05
(c) 0.05
2
Y /10 ~ F10, .
(d) When Y ~ 10 , then
2
(e) Y Z , where Z ~ N (0,1), thus Pr (Y 1) Pr (1 Z 1) 0.32.

2.13.

2
2
2
2
(a) E (Y ) Var (Y ) Y 1 0 1; E (W ) Var (W ) W 100 0 100.

(b)YandWaresymmetricaround0,thusskewnessisequalto0;becausetheirmeaniszero,this
meansthatthethirdmomentiszero.
4
4
4
(c) Thekurtosisofthenormalis3,so 3 E (Y Y ) / Y ;solvingyields E(Y ) 3; asimilar
calculationyieldstheresultsforW.
X 0, sothat S W :
(d) First,conditionon

E ( S | X 0) 0; E ( S 2 | X 0) 100, E ( S 3 |X 0) 0, E ( S 4 | X 0) 3 1002.

Similarly,
2
3
4
E ( S | X 1) 0; E ( S | X 1) 1, E ( S | X 1) 0, E ( S | X 1) 3.

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Fromthelawofiteratedexpectations
E ( S ) E ( S | X 0) Pr (X 0) E ( S | X 1) Pr( X 1) 0
E ( S 2 ) E ( S 2 | X 0) Pr (X 0) E ( S 2 | X 1) Pr( X 1) 100 0.01 1 0.99 1.99
E (S 3 ) E (S 3 | X 0) Pr (X 0) E ( S 3 | X 1) Pr( X 1) 0
E ( S 4 ) E ( S 4 | X 0) Pr (X 0) E ( S 4 | X 1) Pr( X 1)

3 1002 0.01 3 1 0.99 302.97

3
3
(e) S E ( S ) 0, thus E ( S S ) E ( S ) 0 frompart(d).Thusskewness0.Similarly,

S2 E ( S S ) 2 E ( S 2 ) 1.99, and E ( S S ) 4 E ( S 4 ) 302.97. Thus,

kurtosis 302.97 / (1.992 ) 76.5
9.6 10 Y 10 10.4 10

4/n
4/n
4/n

Pr (9.6 Y 10.4) Pr

10.4 10
9.6 10
Z

4/n
4/n

Pr

2.15.

(a)
whereZ~N(0,1).Thus,
(i) n20;

10.4 10
9.6 10
Z
Pr (0.89 Z 0.89) 0.63
4/n
4/n

Pr

(ii) n100;

(iii)

10.4 10
9.6 10
Z
Pr( 2.00 Z 2.00) 0.954
4/n
4/n

Pr

n 1000;

10.4 10
9.6 10
Z
Pr(6.32 Z 6.32) 1.000
4/n
4/n

Pr

4/n

Pr (10 c Y 10 c) Pr

Pr

(b)

Y 10
4/n

4/n

c
c
Z
.
4/n
4/n

c
Asngetlarge 4 / n getslarge,andtheprobabilityconvergesto1.
(c) Thisfollowsfrom(b)andthedefinitionofconvergenceinprobabilitygiveninKeyConcept2.6.
2.17.

2
Y=0.4and Y 0.4 0.6 0.24

(a) (i) P( Y 0.43)

Y 0.4 0.43 0.4

Y 0.4

0.6124
Pr
0.27
0.24/n
0.24/n
0.24/n

Pr

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 Y 0.4 0.37 0.4

Y 0.4

1.22 0.11
Pr
0.24/n
0.24/n
0.24/n

Pr

(ii) P( Y 0.37)

0.41

(b) WeknowPr(1.96Z1.96)0.95,thuswewantntosatisfy
0.39 0.40
1.96.
24 / n
and
Solvingtheseinequalitiesyieldsn9220.

0.41 0.40
1.96
24 / n

Pr (Y y j ) Pr ( X xi , Y y j )
i 1
l

2.19.

Pr (Y y j | X xi )Pr ( X xi )

(a)

i 1

j 1

i 1

E (Y ) y j Pr (Y yj ) yj Pr (Y yj |X xi ) Pr ( X xi )
j 1
l

yj Pr (Y yj |X xi ) Pr ( X xi )

i 1 j 1

E (Y | X xi )Pr ( X xi )

(b)

i 1

(c) When X and Y areindependent,

Pr (X xi , Y y j ) Pr (X xi )Pr (Y yj )
so

XY E[( X X )(Y Y )]
l

( xi X )( y j Y ) Pr ( X xi , Y y j )
i 1 j 1
l

( xi X )( y j Y ) Pr ( X xi ) Pr (Y y j )
i 1 j 1

k
(
x

)
Pr
(
X

x
)

i
X
i ( y j Y ) Pr (Y y j
i 1
j 1

E ( X X ) E (Y Y ) 0 0 0,

corr(X , Y )

XY
0

0
XY XY

E ( X )3 E[( X ) 2 ( X )] E[ X 3 2 X 2 X 2 X 2 2 X 2 3 ]
E ( X 3 ) 3E ( X 2 ) 3 E ( X ) 2 3 E ( X 3 ) 3E ( X 2 ) E ( X )
3E ( X )[ E ( X )]2 [ E ( X )]3
2.21.

(a)

E ( X 3 ) 3E ( X 2 ) E ( X ) 2 E ( X ) 3

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E ( X ) 4 E[( X 3 3 X 2 3 X 2 3 )( X )]
E[ X 4 3 X 3 3 X 2 2 X 3 X 3 3 X 2 2 3 X 3 4 ]
E ( X 4 ) 4 E ( X 3 ) E ( X ) 6 E ( X 2 ) E ( X ) 2 4 E ( X ) E ( X )3 E ( X ) 4
(b)

E ( X 4 ) 4[ E ( X )][ E ( X 3 )] 6[ E ( X )]2 [ E ( X 2 )] 3[ E ( X )]4

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2.23.

XandZaretwoindependentlydistributedstandardnormalrandomvariables,so

X Z 0, X2 Z2 1, XZ 0.
(a) Becauseoftheindependencebetween X and Z , Pr ( Z z| X x) Pr ( Z z ), and
E ( Z |X ) E ( Z ) 0. Thus E (Y | X ) E ( X 2 Z | X ) E ( X 2| X ) E ( Z |X ) X 2 0 X 2
2
2
2
2
2
(b) E ( X ) X X 1, and Y E ( X Z ) E ( X ) Z 1 0 1
3
3
(c) E ( XY ) E ( X ZX ) E ( X ) E ( ZX ). Usingthefactthattheoddmomentsofastandard

normalrandomvariableareallzero,wehave E ( X ) 0. Usingtheindependencebetween
3
X and Z , wehave E ( ZX ) Z X 0. Thus E ( XY ) E ( X ) E ( ZX ) 0.
3

cov (XY ) E[( X X )(Y Y )] E[( X 0)(Y 1)]

E ( XY X ) E ( XY ) E ( X )
0 0 0

0
corr (X , Y ) XY
0
XY XY
(d)

2.25.

i 1

i 1

axi (ax1 ax2 ax3 L axn ) a ( x1 x2 x3 L xn ) a xi

(a)
n

(x
i 1

yi ) ( x1 y1 x2 y2 L xn yn )
( x1 x2 L xn ) ( y1 y2 L yn )

(b)
n

(c)

i 1

i 1

a ) na

i 1
n

i 1

2.27

a (a a a L
(a bx

(d)

xi yi

cyi )2 (a 2 b 2 xi2 c 2 yi2 2abxi 2acyi 2bcxi yi )

i 1

i 1

i 1

i 1

i 1

i 1

na 2 b 2 xi2 c 2 yi2 2ab xi 2ac yi 2bc xi yi

(a) E(W)E[E(W|Z)]E[E(X X%)|Z]E[E(X|Z)E(X|Z)]0.

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(b) E(WZ)E[E(WZ|Z)]E[ZE(W)|Z]E[Z0]0
(c) Usingthehint:VWh(Z),sothatE(V2)E(W2)E[h(Z)2]2E[Wh(Z)].Usingan
argumentlikethatin(b),E[Wh(Z)]0.Thus,E(V2)E(W2)E[h(Z)2],andtheresult
followsbyrecognizingthatE[h(Z)2]0becauseh(z)20foranyvalueofz.

Chapter3
ReviewofStatistics
3.1.

Thecentrallimittheoremsuggeststhatwhenthesamplesize( n )islarge,thedistributionofthe
2
Y2 Y .
N Y , Y2
n Givenapopulation Y 100,
sampleaverage( Y )isapproximately
with

Y2 430, wehave
(a) n 100,

Y2

Y2 43

043,
n 100
and
Y 100

Pr (Y 101) Pr

(b) n 64,

Y2

043

101 100
(1.525) 09364
043

Y2 43

06719,
n 64
and
101 100 Y 100 103 100

06719
06719
06719
(36599) (12200) 09999 08888 01111

Pr(101 Y 103) Pr

(c) n 165,

Y2

Y2 43

02606,
n 165
and

Y 100 98 100

02606
02606
1 ( 39178) (39178) 10000 (rounded to four decimal places)

Pr (Y 98) 1 Pr (Y 98) 1 Pr

3.3.

Denoteeachvoterspreferenceby Y . Y 1 ifthevoterpreferstheincumbentand Y 0 ifthe

voterprefersthechallenger. Y isaBernoullirandomvariablewithprobabilityPr (Y 1) p and
Pr (Y 0) 1 p. FromthesolutiontoExercise3.2, Y hasmean p andvariance p(1 p).

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215
05375.
400

(a)
(b)Theestimatedvarianceof p is

p ) p (1 p ) 0.5375 (1 0.5375) 62148 104.

var(
n
400
The
1

2
standarderrorisSE ( p ) (var( p )) 00249.
(c) Thecomputedtstatisticis

t act

p p0
SE( p )

05375 05
1506
00249

Becauseofthelargesamplesize (n 400), wecanuseEquation(3.14)inthetexttogetthe

pvalueforthetest H 0 p 05 vs. H1 p 05 :

p -value 2 (|t act |) 2 (1506) 2 0066 0132

(d) UsingEquation(3.17)inthetext,thepvalueforthetest H 0 p 05 vs. H1 p 05 is

p -value 1 (t act ) 1 (1506) 1 0934 0066

(e) Part(c)isatwosidedtestandthepvalueistheareainthetailsofthestandardnormal
distributionoutside(calculatedtstatistic).Part(d)isaonesidedtestandthepvalueisthe
areaunderthestandardnormaldistributiontotherightofthecalculatedtstatistic.
(f) Forthetest H 0 p 05 vs. H1 p 05, wecannotrejectthenullhypothesisatthe5%
significancelevel.Thepvalue0.066islargerthan0.05.Equivalentlythecalculatedtstatistic
1506 islessthanthecriticalvalue1.64foraonesidedtestwitha5%significancelevel.The
testsuggeststhatthesurveydidnotcontainstatisticallysignificantevidencethatthe
incumbentwasaheadofthechallengeratthetimeofthesurvey.
3.5.

(a) (i)
Thesizeisgivenby Pr(| p 0.5| .02), wheretheprobabilityiscomputedassuming
that p 0.5.
Pr(|p 0.5| 0.02) 1 Pr( 0.02 p 0.5 .02)
0.02

1 Pr

0.5 0.5/1055

p 0.5
0.5 0.5/1055

0.5 0.5/1055
0.02

p 0.5

1 Pr 1.30
1.30
0.5 0.5/1055

0.19

wherethefinalequalityusingthecentrallimittheoremapproximation.
(ii) Thepowerisgivenby Pr(| p 0.5| 0.02), wheretheprobabilityiscomputedassuming
thatp0.53.

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Pr(|p 0.5| 0.02) 1 Pr( 0.02 p 0.5 .02)

0.02
p 0.5
0.02

0.53 0.47/1055
0.53 0.47/1055
0.53 0.47/1055

1 Pr

0.05

0.53 0.47/1055

1 Pr

p 0.53
0.53 0.47/1055

0.01

0.53 0.47/1055

p 0.53

1 Pr 3.25
0.65
.53 0.47/1055

0.74
wherethefinalequalityusingthecentrallimittheoremapproximation.

0.54 0.50
2.61, and Pr(|t | 2.61) 0.01,
(0.54 0.46) / 1055

(b) (i)
sothatthenullisrejectedatthe
5%level.
(ii) Pr(t 2.61) .004, sothatthenullisrejectedatthe5%level.

(iii) 0.54 1.96 (0.54 0.46) / 1055 0.54 0.03, or 0.51 to 0.57.
(iv) 0.54 2.58 (0.54 0.46) / 1055 0.54 0.04, or 0.50 to 0.58.
(v) 0.54 0.67 (0.54 0.46) / 1055 0.54 0.01, or 0.53 to 0.55.
(c) (i) Theprobabilityis0.95isanysinglesurvey,thereare20independentsurveys,sothe
20
probabilityif 0.95 0.36
(ii) 95%ofthe20confidenceintervalsor19.
1.96 SE( p ) .01 or 1.96 p(1 p) / n .01.
(d) Therelevantequationis
Thusnmustbe
2
1.96 p(1 p )
n
,
0.012
chosensothat
sothattheanswerdependsonthevalueofp.Notethatthe
largestvaluethatp(1p)cantakeonis0.25(thatis,p0.5makesp(1p)aslargeas
1.962 0.25
n
9604,
0.012
possible).Thusif
thenthemarginoferrorislessthan0.01forall
valuesofp.

3.7.

Thenullhypothesisisthatthesurveyisarandomdrawfromapopulationwithp=0.11.Thet
p 0.11
t
,
SE( p ) where SE( p ) p (1 p )/n. (AnalternativeformulaforSE( p )is
statisticis

0.11 (1 0.11) / n, whichisvalidunderthenullhypothesisthat p 0.11). Thevalueofthet

statisticis2.71,whichhasapvalueofthatislessthan0.01.Thusthenullhypothesis p 0.11
(thesurveyisunbiased)canberejectedatthe1%level.
3.9.

Denotethelifeofalightbulbfromthenewprocessby Y . Themeanof Y is andthestandard

deviationof Y is Y 200 hours. Y isthesamplemeanwithasamplesize n 100. The
standarddeviationofthesamplingdistributionof Y is

Y
200

20
n
100
hours.The

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hypothesistestis H 0 : 2000 vs. H1 2000 . Themanagerwillacceptthealternative

hypothesisif Y 2100 hours.
(a) Thesizeofatestistheprobabilityoferroneouslyrejectinganullhypothesiswhenitisvalid.
Thesizeofthemanagerstestis

size Pr(Y 2100| 2000) 1 Pr(Y 2100| 2000)

Y 2000 2100 2000

| 2000
20
20

1 Pr

1 (5) 1 0999999713 287 10 7 ,

where Pr(Y 2100| 2000) meanstheprobabilitythatthesamplemeanisgreaterthan2100
hourswhenthenewprocesshasameanof 2000 hours.
(b)

Thepowerofatestistheprobabilityofcorrectlyrejectinganullhypothesiswhenitisinvalid.We
calculatefirsttheprobabilityofthemanagererroneouslyacceptingthenullhypothesiswhenitis
invalid:
Y 2150 2100 2150

| 2150
20
20

Pr(Y 2100| 2150) Pr

( 25) 1 (25) 1 09938 00062

Thepowerofthemanagerstestingis 1 1 00062 09938.
(c) Foratestwith5%,therejectionregionforthenullhypothesiscontainsthosevaluesofthe
tstatisticexceeding1.645.
t act Y

act

2000
1645 Y act 2000 1645 20 20329
20

Themanagershouldbelievetheinventorsclaimifthesamplemeanlifeofthenewproductis
greaterthan2032.9hoursifshewantsthesizeofthetesttobe5%.
3.11.

Assumethat n isanevennumber.Then Y%isconstructedbyapplyingaweightof1/2tothen/2

oddobservationsandaweightof3/2totheremainingn/2observations.

1 1
3
1
3
E (Y%
) E (Y1 ) E (Y2 ) L E (Yn 1 ) E (Yn )

n 2
2
2
2

1 1 n
3 n
Y Y Y
n 2 2
2 2
1 1
9
1
9

var(Y%
) 2 var(Y1 ) var(Y2 ) L var(Yn 1 ) var(Yn )
n 4
4
4
4

1 1 n 2 9 n 2
Y Y

n2 4 2
4 2

2
1 25 Y
n

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3.13

(a) Samplesize n 420, sampleaverage Y 646.2samplestandarddeviation sY 195.

s
19.5
(Y ) Y
09515.
n
420
Thestandarderrorof Y isSE
The95%confidenceintervalfor
themeantestscoreinthepopulationis

Y 196SE(Y ) 6462 196 09515 (64434 64806)

(b) Thedataare:samplesizeforsmallclasses n1 238, sampleaverage Y 1 6574, sample
s 194;
standarddeviation 1
samplesizeforlargeclasses n2 182, sampleaverage
Y 2 6500, samplestandarddeviation s2 179. Thestandarderrorof Y1 Y2 is
SE (Y1 Y2 )

s12 s22
19.42 17.92

18281.
n1 n2
238
182

Thehypothesistestsforhigheraverage

scoresinsmallerclassesis
H 0 1 2 0

vs H1 1 2 0

Thetstatisticis
t act

Y 1 Y 2 6574 6500 40479

SE(Y 1 Y 2)
18281

Thepvaluefortheonesidedtestis:

p-value 1 (t act ) 1 (40479) 1 0999974147 25853 10 5

Withthesmallpvalue,thenullhypothesiscanberejectedwithahighdegreeofconfidence.
Thereisstatisticallysignificantevidencethatthedistrictswithsmallerclasseshavehigher
averagetestscores.
3.15.

Fromthetextbookequation(2.46),weknowthatE( Y )Yandfrom(2.47)weknowthat
Y2
var( Y ) n .Inthisproblem,becauseYaandYbareBernoullirandomvariables, p a Ya , p b

Yb , Ya2 p (1p )and Yb2 p (1p ).Theanswersto(a)followfromthis.Forpart(b),notethat

a

var( p a p b )var( p a )var( p b )2cov( p a , p b ).But,theyareindependent(andthushave

cov(p a ,p b ) 0because p a and p b areindependent(theydependondatachosenfromindependent

samples).Thusvar( p a p b )var( p a )var( p b ).Forpart(c),useequation3.21fromthetext

(replacing Y with p andusingtheresultin(b)tocomputetheSE).For(d),applytheformulain
(c)toobtain

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0.859(1 0.859) 0.374(1 0.374)

5801
4249
95%CIis(.859.374)1.96
or0.4850.017.

3.17.

(a) The95%confidenceintervalis
SE(Ym , 2008 Ym , 1992 )

2
m ,2008

nm ,2008

Ym , 2008 Ym , 1992 1.96 SE(Ym , 2008 Ym , 1992 )

2
m ,1992

nm ,1992

11.782 10.17 2

0.37;
1838
1594

where

the95%confidence

intervalis(24.9823.27)0.73or1.710.73.
(b) The95%confidenceintervalis
SE(Yw, 2008 Yw, 1992 )

2
w,2008

nw,2008

Yw, 2008 Yw, 1992 1.96 SE(Yw, 2008 Yw, 1992 )

s

2
w ,1992

nw,1992

9.662 7.782

0.31;
1871 1368

is (20.87 20.05) 0.60 or0.820.60.

where

the95%confidenceinterval

(Y
Y
) (Yw, 2004 Yw, 1992 ) 1.96 SE[(Ym, 2008 Ym,1992 )
(c) The95%confidenceintervalis m , 2004 m, 1992
(Yw, 2008 Yw, 1992 )],
SE[(Ym , 2008 Ym , 1992 ) (Yw, 2008 Yw, 1992 )]
where
sm2 ,2008

sm2 ,1992

sw2 ,2008

sw2 ,1992

11.782 10.17 2 9.66 2 7.782

nm,2008 nm,1993 nw,2008 nw,1992

1594 1871 1368 0.48. The95%
1838
confidenceintervalis(24.9823.27)(20.8720.05)1.960.48or0.890.95.

3.19.

(a) No.

E (Yi 2 ) Y2 Y2 and E (YiY j ) Y2 for i j.

2

1
1 n
E (Y ) E Yi 2
n
n i 1
2

E (Y
i 1

1
n2

Thus

E (Y Y )
i 1 j i

2
Y

1
Y2
n

(b) Yes.If Y getsarbitrarilyclosetoYwithprobabilityapproaching1asngetslarge,then Y

getsarbitrarilycloseto Y withprobabilityapproaching1asngetslarge.(Asitturnsout,
thisisanexampleofthecontinuousmappingtheoremdiscussedinChapter17.)
2

3.21.

Setnmnwn,anduseequation(3.19)writethesquaredSEof Ym Yw as

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1
1
in1 (Ymi Ym ) 2
in1 (Ywi Yw )2
(n 1)
(n 1)
2
[ SE (Ym Yw )]

n
n

in1 (Ymi Ym ) 2 in1 (Ywi Yw )2

.
n( n 1)

Similarly,usingequation(3.23)

1 n
1
i 1 (Ymi Ym ) 2
in1 (Ywi Yw ) 2

2( n 1)
( n 1)

[ SE pooled (Ym Yw )]2

2n

in1 (Ymi Ym ) 2 in1 (Ywi Yw ) 2

.
n(n 1)

Chapter4
LinearRegressionwithOneRegressor
4.1.

(a) Thepredictedaveragetestscoreis

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TestScore
5204 582 22 39236
(b) Thepredictedchangeintheclassroomaveragetestscoreis
TestScore (582 19) (582 23) 2328

(c) Usingtheformulafor 0 inEquation(4.8),weknowthesampleaverageofthetestscores

acrossthe100classroomsis
TestScore 0 1 CS 5204 582 214 39585

(d) Usetheformulaforthestandarderroroftheregression(SER)inEquation(4.19)togetthe
sumofsquaredresiduals:

SSR (n 2)SER 2 (100 2) 1152 12961

2

Usetheformulafor R inEquation(4.16)togetthetotalsumofsquares:

TSS

SSR
12961

13044
2
1 R 1 0082

TSS
2
13044
1318.
s sY2 115.
99
Thesamplevarianceis sY n1
Thus,standarddeviationis Y

4.3.

(a) Thecoefficient9.6showsthemarginaleffectofAgeonAWE;thatis,AWEisexpectedto
increaseby$9.6foreachadditionalyearofage.696.7istheinterceptoftheregressionline.It
determinestheoverallleveloftheline.
(b) SERisinthesameunitsasthedependentvariable(Y,orAWEinthisexample).ThusSERis
measuredindollarsperweek.
(c) R2isunitfree.
(d) (i) 696.7 9.6 25 $936.7;
(ii) 696.7 9.6 45 $1,128.7
(e) No.Theoldestworkerinthesampleis65yearsold.99yearsisfaroutsidetherangeofthe
sampledata.
(f) No.Thedistributionofearningispositivelyskewedandhaskurtosislargerthanthenormal.

(g) 0 Y 1 X , sothat Y 0 1 X . ThusthesamplemeanofAWEis696.79.641.6

$1,096.06.

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4.5.

4.7.

(a) uirepresentsfactorsotherthantimethatinfluencethestudentsperformanceontheexam
includingamountoftimestudying,aptitudeforthematerial,andsoforth.Somestudentswill
havestudiedmorethanaverage,otherless;somestudentswillhavehigherthanaverage
aptitudeforthesubject,otherslower,andsoforth.
(b) BecauseofrandomassignmentuiisindependentofXi.Sinceuirepresentsdeviationsfrom
averageE(ui)0.BecauseuandXareindependentE(ui|Xi)E(ui)0.
(c) (2)issatisfiedifthisyearsclassistypicalofotherclasses,thatis,studentsinthisyears
classcanbeviewedasrandomdrawsfromthepopulationofstudentsthatenrollintheclass.
(3)issatisfiedbecause0Yi100andXicantakeononlytwovalues(90and120).
(d) (i) 49 0.24 90 70.6; 49 0.24 120 77.8; 49 0.24 150 85.0
(ii) 0.24 10 2.4.

Theexpectationof 0 isobtainedbytakingexpectationsofbothsidesofEquation(4.8):

1 n
E ( 0 ) E (Y 1 X ) E 0 1 X ui 1 X
n i 1

n
1
0 E ( 1 1 ) X E (ui )
n i 1
0

wherethethirdequalityintheaboveequationhasusedthefactsthatE(ui)0andE[( 1 1) X ]

E[(E( 1 )| X ) X ]because E[( 1 1 ) | X ] 0 (seetextequation(4.31).)

1

4.9.

(a) With 1 0, 0 Y , and Yi 0 Y . ThusESS0andR20.

(b) IfR20,thenESS0,sothat Yi Y foralli.But Yi 0 1 X i , sothat Yi Y foralli,

whichimpliesthat 1 0, orthatX isconstantforalli.IfX isconstantforalli,then

i

n
i 1

(Xi X ) 0
2

and 1 isundefined(seeequation(4.7)).

(a) Theleastsquaresobjectivefunctionis i 1
n

4.11.

(Yi b1 X i ) 2.

Differentiatingwithrespecttob1

(Yi b1 X i ) 2
i 1

yields

b1

2 i 1 X i (Yi b1 X i ).
n

Settingthiszero,andsolvingfortheleast

1
squaresestimatoryields

X Y
i 1
n

i i

X
i 1

2
i

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1
(b) Followingthesamestepsin(a)yields
4.13.

X (Y 4)
i 1

X i2

i 1

TheanswerfollowsthederivationsinAppendix4.3inLargeSampleNormalDistributionofthe
OLSEstimator.Inparticular,theexpressionforiisnowi(XiX)ui,sothatvar(i)
3var[(XiX)ui],andtheterm2carrythroughtherestofthecalculations.

Chapter5
RegressionwithaSingleRegressor:Hypothesis
TestsandConfidenceIntervals
5.1

(a) The95%confidenceintervalfor 1 is {582 196 221}, thatis

10152 1 14884.
(b) Calculatethetstatistic:
t act

1 0 582

26335
SE( 1) 221

Thepvalueforthetest H 0 1 0 vs. H1 1 0 is

p -value 2 ( |t act |) 2 (26335) 2 00042 00084

Thepvalueislessthan0.01,sowecanrejectthenullhypothesisatthe5%significancelevel,
andalsoatthe1%significancelevel.
(c) Thetstatisticis

t act

1 (5.6) 022

0.10
SE ( 1)
221

Thepvalueforthetest H 0 : 1 5.6 vs. H1 : 1 5.6 is

p -value 2 (|t act |) 2 (0.10) 0.92

Thepvalueislargerthan0.10,sowecannotrejectthenullhypothesisatthe10%,5%or1%
significancelevel.Because 1 5.6 isnotrejectedatthe5%level,thisvalueiscontainedin
the95%confidenceinterval.

(d) The99%confidenceintervalfor 0 is {520.4 2.58 20.4}, thatis, 467.7 0 573.0.

5.3.

The99%confidenceintervalis1.5{3.942.580.31)or4.71lbsWeightGain7.11lbs.
2011PearsonEducation,Inc.PublishingasAddisonWesley

5.5

(a) Theestimatedgainfrombeinginasmallclassis13.9points.Thisisequalto
approximately1/5ofthestandarddeviationintestscores,amoderateincrease.

13.9
5.56,
2.5
(b) Thetstatisticis
whichhasapvalueof0.00.Thusthenullhypothesisis
rejectedatthe5%(and1%)level.
t act

(c) 13.92.582.513.96.45.

5.7.

3.2
2.13
(a) Thetstatisticis 1.5
withapvalueof0.03;sincethepvalueislessthan0.05,the
nullhypothesisisrejectedatthe5%level.
(b) 3.21.961.53.22.94
(c) Yes.IfYandXareindependent,then 1 0; butthisnullhypothesiswasrejectedatthe
5%levelinpart(a).
(d) 1 wouldberejectedatthe5%levelin5%ofthesamples;95%oftheconfidenceintervals
wouldcontainthevalue 1 0.

5.9.

(a)

1
n

(Y1 Y2 L Yn )
X
sothatitislinearfunctionofY1,Y2,,Yn.

(b) E(Yi|X1,,Xn)Xi,thus
1

n (Y1 Y2 L Yn )

E ( |X 1 , K , X n ) E
| ( X 1 , K , X n )
X

1
( X1 L X n )
n
.
X

5.11.

Usingtheresultsfrom5.10, 0 Ym and 1 Yw Ym . FromChapter3,

SE (Yw Ym )

2
m

2
w

s
s
.
nm nw

SE (Ym )

sm
nm

and

Plugginginthenumbers 0 523.1 and SE ( 0 ) 6.22; 1 38.0 and

SE ( 1 ) 7.65.
5.13.

5.15.

(a) Yes,thisfollowsfromtheassumptionsinKC4.3.
(b) Yes,thisfollowsfromtheassumptionsinKC4.3andconditionalhomoskedasticity
(c) Theywouldbeunchangedforthereasonsspecifiedintheanswerstothosequestions.
(d) (a)isunchanged;(b)isnolongertrueastheerrorsarenotconditionallyhomosckesdastic.

var ( m,1 w,1 )

Becausethesamplesareindependent, m,1 and w,1 areindependent.Thus
var ( m,1 ) var( w,1 ). Var ( m,1 )
[SE( m ,1 )]2
Var (w,1 )

isconsistentlyestimatedas
and
is

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[SE( w,1 )]2 ,

var( m ,1 w,1 )
consistentlyestimatedas
sothat
isconsistentlyestimatedby
2
2

[SE( m ,1 )] [SE( w,1 )] ,

andtheresultfollowsbynotingtheSEisthesquarerootofthe
estimatedvariance.

2011PearsonEducation,Inc.PublishingasAddisonWesley

Chapter6
LinearRegressionwith
MultipleRegressors
6.1.

Byequation(6.15)inthetext,weknow

R2 1

n 1
(1 R 2 ).
n k 1

Thus,thatvaluesof R are0.175,0.189,and0.193forcolumns(1)(3).
6.3.

6.5.

(a) Onaverage,aworkerearns$0.29/hourmoreforeachyearheages.
(b) Sallysearningspredictionis 440 548 1 262 1 029 29 1567 dollarsperhour.
Betsysearningspredictionis 440 548 1 262 1 029 34 1712 dollarsperhour.
Thedifferenceis1.45
(a) $23,400(recallthatPriceismeasuredin$1000s).
(b) InthiscaseBDR1andHsize100.Theresultingexpectedchangeinpriceis23.4
0.15610039.0thousanddollarsor$39,000.
(c) Thelossis$48,800.
(d) Fromthetext

R 2 1 n n k11 (1 R 2 ),

so

R 2 1 n n k 11 (1 R 2 ),

thus,R20.727.

6.7.

(a) Theproposedresearchinassessingthepresenceofgenderbiasinsettingwagesistoo
limited.Theremightbesomepotentiallyimportantdeterminantsofsalaries:typeofengineer,
amountofworkexperienceoftheemployee,andeducationlevel.Thegenderwiththelower
wagescouldreflectthetypeofengineeramongthegender,theamountofworkexperienceof
theemployee,ortheeducationleveloftheemployee.Theresearchplancouldbeimproved
withthecollectionofadditionaldataasindicatedandanappropriatestatisticaltechniquefor
analyzingthedatawouldbeamultipleregressioninwhichthedependentvariableiswages
andtheindependentvariableswouldincludeadummyvariableforgender,dummyvariables
fortypeofengineer,workexperience(timeunits),andeducationlevel(highestgradelevel
completed).Thepotentialimportanceofthesuggestedomittedvariablesmakesadifference
inmeanstestinappropriateforassessingthepresenceofgenderbiasinsettingwages.
(b) Thedescriptionsuggeststhattheresearchgoesalongwaytowardscontrollingforpotential
omittedvariablebias.Yet,therestillmaybeproblems.Omittedfromtheanalysisare
characteristicsassociatedwithbehaviorthatledtoincarceration(excessivedrugoralcohol
use,gangactivity,andsoforth),thatmightbecorrelatedwithfutureearnings.Ideally,dataon
thesevariablesshouldbeincludedintheanalysisasadditionalcontrolvariables.

6.9.

Foromittedvariablebiastooccur,twoconditionsmustbetrue:X1(theincludedregressor)is
correlatedwiththeomittedvariable,andtheomittedvariableisadeterminantofthedependent

variable.SinceX1andX2areuncorrelated,theestimatorof1doesnotsufferfromomitted
variablebias.
6.11.

(a)

(Y b X
i

1i

b2 X 2i )2

(Yi b1 X 1i b2 X 2i ) 2
2 X 1i (Yi b1 X 1i b2 X 2 i )
b1
(Yi b1 X 1i b2 X 2 i )2
2 X 2i (Yi b1 X 1i b2 X 2 i )
b2
(b)

(c) From(b), 1 satisfies

1i

(Yi 1 X 1i 1 X 2 i ) 0

X 1iYi 2 X 1i X 2i
1
X 12i

or
andtheresultfollowsimmediately.
(d) Followinganalysisasin(c)

X 2iYi 1 X 1i X 2i
2
X 22i

andsubstitutingthisintotheexpressionfor 1 in(c)yields
X Y
X 1i X 2 i
X 1iY 2 i i X1
X 1i X 2 i
2
2i

1
.
X 12i

Solvingfor 1 yields:
X 22i X 1iYi X 1i X 2 i X 2iYi
1
X 12i X 22i ( X 1i X 2 i ) 2

(e) Theleastsquaresobjectivefunctionis
withrespecttob0is

(Yi b0 b1 X 1i b2 X 2 i ) 2

andthepartialderivative

(Yi b0 b1 X 1i b2 X 2 i ) 2
2 (Yi b0 b1 X 1i b2 X 2i ).
b0

Settingthistozeroandsolvingfor 0 yields: 0 Y 1 X 1 2 X 2 .

(f) Substituting 0 Y 1 X 1 2 X 2 intotheleastsquaresobjectivefunctionyields

2
(Yi 0 b1 X 1i b2 X 2i )2 (Yi Y ) b1 ( X1i X1 ) b2 ( X 2i X 2 ) ,whichisidentical
totheleastsquaresobjectivefunctioninpart(a),exceptthatallvariableshavebeenreplaced
withdeviationsfromsamplemeans.Theresultthenfollowsasin(c).

2011PearsonEducation,Inc.PublishingasAddisonWesley

Noticethattheestimatorfor1isidenticaltotheOLSestimatorfromtheregressionofYonto
( X X 1 )( X 2 i X 2 ) 0
X1,omittingX2.Saiddifferently,when 1i
,theestimatedcoefficient
onX1intheOLSregressionofYontobothX1andX2isthesameasestimatedcoefficientin
theOLSregressionofYontoX1.

Chapter7
HypothesisTestsandConfidence
IntervalsinMultipleRegression
7.1and7.2
Regressor

(1)

(2)

(3)

College(X1)

5.46**
(0.21)

5.48**
(0.21)

5.44**
(0.21)

Female(X2)

2.64**
(0.20)

2.62**
(0.20)

2.62**
(0.20)

0.29**
(0.04)

0.29**
(0.04)

Age(X3)
Ntheast(X4)

0.69*
(0.30)

Midwest(X5)

0.60*
(0.28)

South(X6)

0.27
(0.26)

Intercept

12.69**
(0.14)

4.40**
(1.05)

3.75**
(1.06)

(a) Thetstatisticis5.46/0.2126.0,whichexceeds1.96inabsolutevalue.Thus,thecoefficient
isstatisticallysignificantatthe5%level.The95%confidenceintervalis5.461.960.21.
(b) tstatisticis2.64/0.2013.2,and13.21.96,sothecoefficientisstatisticallysignificant
atthe5%level.The95%confidenceintervalis2.641.960.20.
7.3.

(a) Yes,ageisanimportantdeterminantofearnings.Usingattest,thetstatisticis
0.29 / 0.04 7.25, withapvalueof4.21013,implyingthatthecoefficientonageis
statisticallysignificantatthe1%level.The95%confidenceintervalis0.291.960.04.
(b) Age[0.291.960.04]5[0.291.960.04]1.451.960.20$1.06to$1.84
t

7.5.

college,1998 college,1992
SE( college,1998 college, 1992 )

Thetstatisticforthedifferenceinthecollegecoefficientsis
.Because
college,1998
college,1992
and
arecomputedfromindependentsamples,theyareindependent,which

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meansthat

cov( college,1998 , college,1992 ) 0

var( college,1998 ) var( college,1998 )

t act

Thus,

var( college,1998 college,1992 )

.Thisimpliesthat

=
1

SE( college,1998 college,1992 ) (0.212 0.202 ) 2 .

5.48 5.29

0.6552.
0.212 0.20 2
Thus,
Thereisnosignificantchangesincethecalculatedtstatistic
islessthan1.96,the5%criticalvalue.

7.7.

(a) Thetstatisticis 0.485 / 2.61 0.186 1.96. Therefore,thecoefficientonBDRisnot

statisticallysignificantlydifferentfromzero.
(b) ThecoefficientonBDRmeasuresthepartialeffectofthenumberofbedroomsholdinghouse
size(Hsize)constant.Yet,thetypical5bedroomhouseismuchlargerthanthetypical
2bedroomhouse.Thus,theresultsin(a)sayslittleabouttheconventionalwisdom.
(c) The99%confidenceintervalforeffectoflotsizeonpriceis2000[0.0022.580.00048]
or1.52to6.48(inthousandsofdollars).
(d) Choosingthescaleofthevariablesshouldbedonetomaketheregressionresultseasytoread
andtointerpret.Ifthelotsizeweremeasuredinthousandsofsquarefeet,theestimate
coefficientwouldbe2insteadof0.002.

(e) The10%criticalvaluefromthe 2, distributionis2.30.Because0.082.30,thecoefficients

arenotjointlysignificantatthe10%level.
7.9.

(a) Estimate
Yi 0 X 1i 2 ( X 1i X 2i ) ui

andtestwhether0.
(b) Estimate
Yi 0 X 1i 2 ( X 2 i aX 1i ) ui

andtestwhether0.
(c) Estimate
Yi X 1i 0 X 1i 2 ( X 2i X1i ) ui

andtestwhether0.
7.11.

(a) Treatment(assignmenttosmallclasses)wasnotrandomlyassignedinthepopulation(the
continuingandnewlyenrolledstudents)becauseofthedifferenceintheproportionoftreated
continuingandnewlyenrolledstudents.Thus,thetreatmentindicatorX1iscorrelatedwithX2.
Ifnewlyenrolledstudentsperformsystematicallydifferentlyonstandardizedteststhan
continuingstudents(perhapsbecauseofadjustmenttoanewschool),thenthisbecomespart
oftheerrortermuin(a).ThisleadstocorrelationbetweenX1andu,sothatE(u|Xl)0.

BecauseE(u|X )0,the 1 isbiasedandinconsistent.

l

(b)Becausetreatmentwasrandomlyassignedconditionalonenrollmentstatus(continuingor
newlyenrolled),E(u|X1,X2)willnotdependonX1.Thismeansthattheassumptionof

conditionalmeanindependenceissatisfied,and 1 isunbiasedandconsistent.However,
becauseX2wasnotrandomlyassigned(newlyenrolledstudentsmay,onaverage,have
attributesotherthanbeingnewlyenrolledthataffecttestscores),E(u|X1,X2)maydependof

X2,sothat 2 maybebiasedandinconsistent.

2011PearsonEducation,Inc.PublishingasAddisonWesley

Chapter8
NonlinearRegressionFunctions

8.1.

100

(a) Thepercentageincreaseinsalesis
is100[ln(198)ln(196)]1.0152%.

198 196
1.0204%.
196
Theapproximation
100

205 196
4.5918%
196
andthe

(b) WhenSales2010205,thepercentageincreaseis
approximationis100[ln(205)ln(196)]4.4895%.WhenSales2010250,thepercentage
250 196
100
27.551%
196
increaseis
andtheapproximationis100[ln(250)ln(196)]

100

500 196
155.1%
196
andthe

24.335%.WhenSales2010500,thepercentageincreaseis
approximationis100[ln(500)ln(196)]93.649%.
(c) Theapproximationworkswellwhenthechangeissmall.Thequalityoftheapproximation
deterioratesasthepercentagechangeincreases.

8.3.

(a) Theregressionfunctionsforhypotheticalvaluesoftheregressioncoefficientsthatare
consistentwiththeeducatorsstatementare: 1 0 and 2 0. When TestScore isplotted
against STR theregressionwillshowthreehorizontalsegments.Thefirstsegmentwillbefor
valuesof STR 20; thenextsegmentfor 20 STR 25; thefinalsegmentfor STR 25. The
firstsegmentwillbehigherthanthesecond,andthesecondsegmentwillbehigherthanthe
third.
(b) Ithappensbecauseofperfectmulticollinearity.Withallthreeclasssizebinaryvariables
includedintheregression,itisimpossibletocomputetheOLSestimatesbecausetheintercept
isaperfectlinearfunctionofthethreeclasssizeregressors.

8.5.

(a) (1)
Thedemandforolderjournalsislesselasticthanforyoungerjournalsbecausethe
interactiontermbetweenthelogofjournalageandpricepercitationispositive.(2)There
isalinearrelationshipbetweenlogpriceandlogofquantityfollowsbecausetheestimated
coefficientsonlogpricesquaredandlogpricecubedarebothinsignificant.(3)Thedemand
isgreaterforjournalswithmorecharactersfollowsfromthepositiveandstatistically
significantcoefficientestimateonthelogofcharacters.

(b) (i) Theeffectofln(Pricepercitation)isgivenby[0.8990.141ln(Age)]ln(Priceper

citation).UsingAge80,theelasticityis[0.8990.141ln(80)]0.28.

(ii) Asdescribedinequation(8.8)andthefootnoteonpage261,thestandarderrorcanbefound
bydividing0.28,theabsolutevalueoftheestimate,bythesquarerootofthe
Fstatistictestingln(Pricepercitation)ln(80)ln(Age)ln(Pricepercitation)0.
(c)

Characters
ln(Characters ) ln(a)
a

foranyconstanta.Thus,estimatedparameteron

ln

Characterswillnotchangeandtheconstant(intercept)willchange.
8.7.

(a) (i) ln(Earnings)forfemalesare,onaverage,0.44lowerformenthanforwomen.

(ii) Theerrortermhasastandarddeviationof2.65(measuredinlogpoints).
(iii) Yes.Howevertheregressiondoesnotcontrolformanyfactors(sizeoffirm,industry,
profitability,experienceandsoforth).
(iv) No.Inisolation,theseresultsdonotimplygenderdiscrimination.Genderdiscrimination
meansthattwoworkers,identicalineverywaybutgender,arepaiddifferentwages.Thus,
itisalsoimportanttocontrolforcharacteristicsoftheworkersthatmayaffecttheir
productivity(education,yearsofexperience,etc.)Ifthesecharacteristicsaresystematically
differentbetweenmenandwomen,thentheymayberesponsibleforthedifferenceinmean
wages.(Ifthisweretrue,itwouldraiseaninterestingandimportantquestionofwhywomen
tendtohavelesseducationorlessexperiencethanmen,butthatisaquestionabout
somethingotherthangenderdiscriminationintopcorporatejobs.)Thesearepotentially
importantomittedvariablesintheregressionthatwillleadtobiasintheOLScoefficient
estimatorforFemale.Sincethesecharacteristicswerenotcontrolledforinthestatistical
analysis,itisprematuretoreachaconclusionaboutgenderdiscrimination.
(b) (i) IfMarketValueincreasesby1%,earningsincreaseby0.37%

(ii) Femaleiscorrelatedwiththetwonewincludedvariablesandatleastoneofthevariablesis
importantforexplainingln(Earnings).Thustheregressioninpart(a)sufferedfromomitted
variablebias.
(c) ForgettingabouttheeffectorReturn,whoseeffectsseemssmallandstatisticallyinsignificant,
theomittedvariablebiasformula(seeequation(6.1))suggeststhatFemaleisnegatively
correlatedwithln(MarketValue).

8.9.

Notethat

Y 0 1 X 2 X 2
0 ( 1 21 2 ) X 2 ( X 2 21X ).

2
Defineanewindependentvariable Z X 21X , andestimate

Y 0 X 2 Z ui

Theconfidenceintervalis
8.11.

196 SE .

dE (Y | X )
1
dX
Linearmodel:E(Y|X)01X,sothat
andtheelasticityis
1 X
X
1

E (Y | X ) 0 1 X

E e 0 1 ln( X ) u | X e 0 1 ln( X ) E (eu | X ) ce 0 1 ln( X )

LogLogModel:E(Y|X)
,wherec
u
E(e |X),whichdoesnotdependonXbecauseuandXareassumedtobeindependent.

dE (Y | X ) 1 0 1 ln( X )
E (Y | X )
ce
1
dX
X
X
Thus
,andtheelasticityis1.

Chapter9
AssessingStudiesBasedon
MultipleRegression
9.1.

Asexplainedinthetext,potentialthreatstoexternalvalidityarisefromdifferencesbetweenthe
populationandsettingstudiedandthepopulationandsettingofinterest.Thestatisticalresults
basedonNewYorkinthe1970sarelikelytoapplytoBostoninthe1970sbutnottoLosAngeles
inthe1970s.In1970,NewYorkandBostonhadlargeandwidelyusedpublictransportation
systems.AttitudesaboutsmokingwereroughlythesameinNewYorkandBostoninthe1970s.In
contrast,LosAngeleshadaconsiderablysmallerpublictransportationsystemin1970.Most
residentsofLosAngelesreliedontheircarstocommutetowork,school,andsoforth.Theresults
fromNewYorkinthe1970sareunlikelytoapplytoNewYorkin2010.Attitudestowards
smokingchangedsignificantlyfrom1970to2010.

9.3.

Thekeyisthattheselectedsamplecontainsonlyemployedwomen.Considertwowomen,Beth
andJulie.Bethhasnochildren;Juliehasonechild.BethandJulieareotherwiseidentical.Both

canearn$25,000peryearinthelabormarket.Eachmustcomparethe$25,000benefittothecosts
ofworking.ForBeth,thecostofworkingisforgoneleisure.ForJulie,itisforgoneleisureandthe
costs(pecuniaryandother)ofchildcare.IfBethisjustonthemarginbetweenworkinginthe
labormarketornot,thenJulie,whohasahigheropportunitycost,willdecidenottoworkinthe
labormarket.Instead,Juliewillworkinhomeproduction,caringforchildren,andsoforth.
Thus,onaverage,womenwithchildrenwhodecidetoworkarewomenwhoearnhigherwagesin
thelabormarket.

9.5.

1 0 0 1 1u 1v

.
1 1
1 1

0 0
uv

.
1 1 1 1

(a)
and
E (Q)

(b)

1 0 0 1
0
, E ( P) 0
1 1
1 1

1
2 2
2 2
var(Q)
( 1 u 1 v ), var( P )
1 1
1
2
2

( u v ),

1
1

(c)
and

1
2
2
cov( P, Q)
( 1 u 1 V )
1 1

2 1 v2
p cov(Q, P )
1
1 u2
,
2
var(
P
)

u
v
(d) (i)

cov( P, Q )
p
0
E (Q ) E ( P )
var( P)

( )
1 1 u 2 1 2 1 0,
u v
(ii)
usingthefactthat10(supplycurvesslopeup)and10
(demandcurvesslopedown).
p

9.7.

(a) True.CorrelationbetweenregressorsanderrortermsmeansthattheOLSestimatoris
inconsistent.
(b) True.

9.9.

Bothregressionssufferfromomittedvariablebiassothattheywillnotprovidereliableestimates
ofthecausaleffectofincomeontestscores.However,thenonlinearregressionin(8.18)fitsthe
datawell,sothatitcouldbeusedforforecasting.

9.11.

Again,therearereasonsforconcern.Hereareafew.
Internalconsistency:Totheextentthatpriceisaffectedbydemand,theremaybesimultaneous
equationbias.

Externalconsistency:TheinternetandintroductionofEjournalsmayinduceimportantchangesin
themarketforacademicjournalssothattheresultsfor2000maynotberelevantfortodaysmarket.


1 i 1

300

9.13.

%
( X%
i X )(Yi Y )

(a)

300
i 1

%2
( X%
i X)

.BecausealloftheXisareused(althoughsomeareusedfor

thewrongvaluesofYj), X% X ,and i 1
Usingtheseexpressions:
n

1 1 in1

0.8 n

i 1

( X i X )2

( X i X )2

n
i 0.8 n 1

( X i X )2

.Also, Yi Y 1 ( X i X ) ui u .

( X%
i X )( X i X )
n
i 1

( X i X )2

n
i 1

( X%i X )(ui u )

n
i 1

( X i X )2

1 0.8 n
1 n
1 n %
( X i X )2
( X%

i 1 ( X i X )(ui u )
i X )( X i X )
i 1
i 0.8 n 1
n
n
n
1
1

1 n
1 n
1 n
2
2
(
X

X
)
(
X

X
)

( X i X )2
i
i
i 1
i 1
n
n
n i 1

wheren300,andthelastequalityusesanorderingoftheobservationssothatthefirst

240observations(0.8n)correspondtothecorrectlymeasuredobservations( X i Xi).
Asisdoneelsewhereinthebook,weinterpretn300asalargesample,soweusethe
approximationofntendingtoinfinity.Thesolutionprovidedherethusshowsthatthese
expressionsareapproximatelytruefornlargeandholdinthelimitthatntendstoinfinity.

Eachoftheaveragesintheexpressionfor 1 havethefollowingprobabilitylimits:
p
1 n
2
(
X

X
)

X2

i
i 1
n
,
p
1 0.8 n
2
(
X

X
)

0.8 X2

i
n i 1
,
p
1 n %
(
X

X
)(
u

u
)

i
i
n i 1
,and
p
1 n
% X )( X X ) 0
(
X

i
i
n i 0.8n 1
,

wherethelastresultfollowsbecause X i XiforthescrambledobservationsandXjis
p

independentofX forij.Takentogether,theseresultsimply 1 0.81 .

i

(b) Because 1 0.81 , 1 / 0.8 1 ,soaconsistentestimatorof1istheOLSestimator

dividedby0.8.

(c) Yes,theestimatorbasedonthefirst240observationsisbetterthantheadjustedestimator
frompart(b).Equation(4.21)inKeyConcept4.4(page129)impliesthattheestimatorbased
onthefirst240observationshasavariancethatis
1 var ( X i X )ui
var( 1 (240obs ))
2
240
var( X i )

Frompart(a),theOLSestimatorbasedonalloftheobservationshastwosourcesofsampling
300
( X% X )(u u )
i

i 1

error.Thefirstis

300
i 1

( X i X )2

whichistheusualsourcethatcomesfromthe
( X% X )( X X )
300

i 241

i 1 ( X i X )2 ,whichisthesourcethatcomes
omittedfactors(u).Thesecondis
fromscramblingthedata.Thesetwotermsareuncorrelatedinlargesamples,andtheir
respectivelargesamplevariancesare:

var

300

( X%
1 var ( X i X )ui
i X )(ui u )

300
2
2
i 1 ( X i X ) 300 var( X i )

300

i 1

and

var 1

( X%i X )( X i X )
12 0.2
300
2
300
i 1 ( X i X )

300

i 241

Thus

1 (300obs)
1 1 var ( X i X )ui
2 0.2

1
2

0.8
0.64 300
300
var( X i )

var

whichislargerthanthevarianceoftheestimatorthatonlyusesthefirst240observations.

Thus


1 (300obs)
1 1 var ( X i X )ui
2 0.2

1
2
0.8
0.64 300
300
var( X i )

var

whichislargerthanthevarianceoftheestimatorthatonlyusesthefirst240observations.

Chapter10
RegressionwithPanelData
10.1.

(b)

(c)

(d)
(e)

(a) Witha$1increaseinthebeertax,theexpectednumberoflivesthatwouldbesavedis
0.45per10,000people.SinceNewJerseyhasapopulationof8.1million,theexpected
numberoflivessavedis0.45810364.5.The95%confidenceintervalis(0.451.96
0.22)810[15.228,713.77].
WhenNewJerseylowersitsdrinkingagefrom21to18,theexpectedfatalityrateincreasesby
0.028deathsper10,000.The95%confidenceintervalforthechangeindeathrateis0.028
1.960.066[0.1014,0.1574].Withapopulationof8.1million,thenumberoffatalities
willincreaseby0.02881022.68witha95%confidenceinterval[0.1014,0.1574]810
[82.134,127.49].
WhenrealincomepercapitainNewJerseyincreasesby1%,theexpectedfatalityrate
increasesby1.81deathsper10,000.The90%confidenceintervalforthechangeindeathrate
is1.811.640.47[1.04,2.58].Withapopulationof8.1million,thenumberoffatalities
willincreaseby1.818101466.1witha90%confidenceinterval[1.04,2.58]810
[840,2092].
Thelowpvalue(orhighFstatistic)associatedwiththeFtestontheassumptionthattime
effectsarezerosuggeststhatthetimeeffectsshouldbeincludedintheregression.
Defineabinaryvariablewestwhichequals1forthewesternstatesand0fortheotherstates.
Includetheinteractiontermbetweenthebinaryvariablewestandtheunemploymentrate,
west(unemploymentrate),intheregressionequationcorrespondingtocolumn(4).Suppose
thecoefficientassociatedwithunemploymentrateisandthecoefficientassociatedwith
west(unemploymentrate)is.Thencapturestheeffectoftheunemploymentrateinthe
easternstates,andcapturestheeffectoftheunemploymentrateinthewesternstates.
Thedifferenceintheeffectoftheunemploymentrateinthewesternandeasternstatesis .

Usingthecoefficientestimate ( ) andthestandarderror SE( ), youcancalculatethet

statistictotestwhetherisstatisticallysignificantatagivensignificancelevel.

10.3.

Thefivepotentialthreatstotheinternalvalidityofaregressionstudyare:omittedvariables,
misspecificationofthefunctionalform,imprecisemeasurementoftheindependentvariables,
sampleselection,andsimultaneouscausality.Youshouldthinkaboutthesethreatsonebyone.
Arethereimportantomittedvariablesthataffecttrafficfatalitiesandthatmaybecorrelatedwith

theothervariablesincludedintheregression?Themostobviouscandidatesarethesafetyofroads,
weather,andsoforth.Thesevariablesareessentiallyconstantoverthesampleperiod,sotheir
effectiscapturedbythestatefixedeffects.Youmaythinkofsomethingthatwemissed.Since
mostofthevariablesarebinaryvariables,thelargestfunctionalformchoiceinvolvestheBeerTax
variable.Alinearspecificationisusedinthetext,whichseemsgenerallyconsistentwiththedata
inFigure8.2.Tocheckthereliabilityofthelinearspecification,itwouldbeusefultoconsidera
logspecificationoraquadratic.Measurementerrordoesnotappeartoaproblem,asvariableslike
trafficfatalitiesandtaxesareaccuratelymeasured.Similarly,sampleselectionisanotaproblem
becausedatawereusedfromallofthestates.Simultaneouscausalitycouldbeapotentialproblem.
Thatis,stateswithhighfatalityratesmightdecidetoincreasetaxestoreduceconsumption.Expert
knowledgeisrequiredtodetermineifthisisaproblem.

10.5.

LetD2i1ifi2and0otherwise;D3i1ifi3and0otherwiseDni1ifinand0
otherwise.LetB2t1ift2and0otherwise;B3t1ift3and0otherwiseBTt1iftT
and0otherwise.Let011;i i 1andt t 1.

10.7.

(a) Averagesnowfalldoesnotvaryovertime,andthuswillbeperfectlycollinearwiththe
statefixedeffect.
(b) Snowitdoesvarywithtime,andsothismethodcanbeusedalongwithstatefixedeffects.

u2
.
1 T Y
(a) i T t 1 it whichhasvariance T BecauseTisnotgrowing,thevarianceisnot

gettingsmall. i isnotconsistent.

10.9.

(b) Theaveragein(a)iscomputedoverTobservations.InthiscaseTissmall(T4),sothe
normalapproximationfromtheCLTisnotlikelytobeverygood.

10.11 Usingthehint,equation(10.22)canbewrittenas

1DM

n
i 1

1
1

X i 2 X i1 Yi 2 Yi1 X i 2 X i1 Yi 2 Yi1
4
4

n 1
1
2
2
i 1 4 X i 2 X i1 4 X i 2 X i1

X X Y Y

X X
n

i2

i 1

i1

i2

i 1

i1

i2

BA
1

i1

RegressionwithaBinary
DependentVariable

Chapter11

11.1.

(a) ThetstatisticforthecoefficientonExperienceis0.031/0.0093.44,whichissignificant
atthe1%level.
(b) zMatthew 0.712 0.031 10 1.022; (1.022) 0.847
z
0.712 0.031 0 0.712; (0.712) 0.762
(c) Christopher
(d) z Jed 0.712 0.031 80 3.192; (3.192) 0.999, thisisunlikelytobeaccuratebecausethe
sampledidnotincludeanyonewithmorethat40yearsofdrivingexperience.

11.3.

(a) ThetstatisticforthecoefficientonExperienceist0.006/0.0023,whichissignificant
athe1%level.
ProbMatther0.7740.006100.836
ProbChristopher0.7740.00600.774
(b)

Theprobabilitiesaresimilarexceptwhenexperienceinlarge(40years).Inthiscasethe
LPMmodelproducesnonsensicalresults(probabilitiesgreaterthan1.0).
11.5.

(a) (0.8060.041100.17410.015110)0.814
(b) (0.8060.04120.17400.01502)0.813
(c) Thetstatontheinteractiontermis0.015/0.0190.79,whichisnotsignificantatthe10%
level.

11.7.

(a) ForablackapplicanthavingaP/Iratioof0.35,theprobabilitythattheapplicationwillbe
1
F ( 4.13 5.37 0.35 1.27)
27.28%.
1 e0.9805
deniedis

(b) WiththeP/Iratioreducedto0.30,theprobabilityofbeingdeniedis
1
F (4.13 5.37 0.30 1.27)
22.29%
1 e1.249
.Thedifferenceindenialprobabilities
comparedto(a)is4.99percentagepointslower.
(c) ForawhiteapplicanthavingaP/Iratioof0.35,theprobabilitythattheapplicationwillbe
1
F (4.13 5.37 0.35)
9.53%.
1 e2.2505
deniedis
IftheP/Iratioisreducedto0.30,the

F (4.13 5.37 0.30)

1
7.45%.
1 e2.519
Thedifferencein

probabilityofbeingdeniedis
denialprobabilitiesis2.08percentagepointslower.
(d) Fromtheresultsinparts(a)(c),wecanseethatthemarginaleffectoftheP/Iratioonthe
probabilityofmortgagedenialdependsonrace.Inthelogitregressionfunctionalform,
themarginaleffectdependsonthelevelofprobabilitywhichinturndependsontherace
oftheapplicant.Thecoefficientonblackisstatisticallysignificantatthe1%level.Thelogit
andprobitresultsaresimilar.
11.9.

(a) Thecoefficientonblackis0.084,indicatinganestimateddenialprobabilitythatis
8.4percentagepointshigherfortheblackapplicant.
(b) The95%confidenceintervalis0.0841.960.023[3.89%,12.91%].
(c) Theanswerin(a)willbebiasedifthereareomittedvariableswhichareracerelatedandhave
impactsonmortgagedenial.Suchvariableswouldhavetoberelatedwithraceandalsobe
relatedwiththeprobabilityofdefaultonthemortgage(whichinturnwouldleadtodenialof
themortgageapplication).Standardmeasuresofdefaultprobability(pastcredithistoryand
employmentvariables)areincludedintheregressionsshowninTable9.2,sotheseomitted
variablesareunlikelytobiastheanswerin(a).Othervariablessuchaseducation,marital
status,andoccupationmayalsoberelatedtheprobabilityofdefault,andthesevariablesare
omittedfromtheregressionincolumn.Addingthesevariables(seecolumns(4)(6))have
littleeffectontheestimatedeffectofblackontheprobabilityofmortgagedenial.

11.11.

(a) Thisisacensoredortruncatedregressionmodel(notethedependentvariablemightbe
zero).
(b) Thisisanorderedresponsemodel.
(c) Thisisthediscretechoice(ormultiplechoice)model.
(d) Thisisamodelwithcountdata.

Chapter12
InstrumentalVariablesRegression
12.1.

12.3.

cigarettes
ln( Pi ,cigarettes
) ln( Pi ,1985
),
1995
(a) Thechangeintheregressor,
froma$0.50perpackincreasein
theretailpriceisln(8.00)ln(7.50)0.0645.Theexpectedpercentagechangeincigarette
demandis0.940.0645100%.07%.The95%confidenceintervalis(0.941.96
0.21)0.0645100%[8.72%,3.41%].
(b) Witha2%reductioninincome,theexpectedpercentagechangeincigarettedemandis
0.53(0.02)100%1.06%.
(c) Theregressionincolumn(1)willnotprovideareliableanswertothequestionin(b)when
recessionslastlessthan1year.Theregressionincolumn(1)studiesthelongrunpriceand
incomeelasticity.Cigarettesareaddictive.Theresponseofdemandtoanincomedecrease
willbesmallerintheshortrunthaninthelongrun.
(d) Theinstrumentalvariablewouldbetooweak(irrelevant)iftheFstatisticincolumn(1)was
3.6insteadof33.6,andwecannotrelyonthestandardmethodsforstatisticalinference.Thus
theregressionwouldnotprovideareliableanswertothequestionposedin(a).

2 1 n (Y 0TSLS 1TSLS X i )2
2
(a) Theestimator a n 2 i 1 i
isnotconsistent.Writethisas a
1
TSLS TSLS
TSLS
in1 (ui 1TSLS ( X i X i )) 2 ,
n2
where ui Yi 0 1 X i . Replacing 1 with1,
2 1 n (u 1 ( X i X i )) 2 1n in1 ui2
assuggestedinthequestion,writethisas a n i 1 i
1
in1[ 12 ( X i X i )2 2ui 1 ( X i X i )].
n
Thefirsttermontherighthandsideoftheequation
convergesto u , butthesecondtermconvergestosomethingthatisnonzero.Thus a is
notconsistent.

(b) Theestimator

b2

(a),wecanwrite
12.5.

1
n 2

in1 (Yi 0TSLS 1TSLS X i ) 2

u ,
2
b

1
n

n
2
i 1 i

isconsistent.Usingthesamenotationasin

andthisestimatorconvergesinprobabilityto u .

(a) Instrumentrelevance. Z i doesnotenterthepopulationregressionfor X i

(b) Zisnotavalidinstrument. X willbeperfectlycollinearwithW.(Alternatively,thefirststage

regressionsuffersfromperfectmulticollinearity.)
(c) Wisperfectlycollinearwiththeconstantterm.
(d) Zisnotavalidinstrumentbecauseitiscorrelatedwiththeerrorterm.
12.7.

(a) Underthenullhypothesisofinstrumentexogeneity,theJstatisticisdistributedasa 1
randomvariable,witha1%criticalvalueof6.63.Thusthestatisticissignificant,andinstrument
exogeneityE(ui|Z1i,Z2i)0isrejected.
2

(b) TheJtestsuggeststhatE(ui |Z1i,Z2i)0,butdoesntprovideevidenceaboutwhetherthe

problemiswithZ1orZ2orboth.

12.9.

(a) Thereareotherfactorsthatcouldaffectboththechoicetoserveinthemilitaryandannual
earnings.Oneexamplecouldbeeducation,althoughthiscouldbeincludedintheregression
asacontrolvariable.Anothervariableisabilitywhichisdifficulttomeasure,andthus
difficulttocontrolforintheregression.

(b) Thedraftwasdeterminedbyanationallotterysothechoiceofservinginthemilitarywas
random.Becauseitwasrandomlyselected,thelotterynumberisuncorrelatedwithindividual
characteristicsthatmayaffectearningandhencetheinstrumentisexogenous.Becauseit
affectedtheprobabilityofservinginthemilitary,thelotterynumberisrelevant.

Chapter13
ExperimentsandQuasiExperiments
13.1.

Forstudentsinkindergarten,theestimatedsmallclasstreatmenteffectrelativetobeingina
regularclassisanincreaseof13.90pointsonthetestwithastandarderror2.45.The95%
confidenceintervalis13.901.962.45[9.098,18.702].
Forstudentsingrade1,theestimatedsmallclasstreatmenteffectrelativetobeinginaregular
classisanincreaseof29.78pointsonthetestwithastandarderror2.83.The95%confidence
intervalis29.781.962.83[24.233,35.327].

Forstudentsingrade2,theestimatedsmallclasstreatmenteffectrelativetobeinginaregular
classisanincreaseof19.39pointsonthetestwithastandarderror2.71.The95%confidence
intervalis19.391.962.71[14.078,24.702].

Forstudentsingrade3,theestimatedsmallclasstreatmenteffectrelativetobeinginaregular
classisanincreaseof15.59pointsonthetestwithastandarderror2.40.The95%confidence
intervalis15.591.962.40[10.886,20.294].

13.3.

X
X Control
(a) Theestimatedaveragetreatmenteffectis TreatmentGroup
1241120140
points.
(b) Therewouldbenonrandomassignmentifmen(orwomen)haddifferentprobabilitiesofbeing
assignedtothetreatmentandcontrolgroups.LetpMendenotetheprobabilitythatamaleis
assignedtothetreatmentgroup.RandomassignmentmeanspMen0.5.Testingthisnull
p Men 0.5
0.55 0.50
tMen

1.00,
1
1
p Men (1 p Men )
0.55(1 0.55)
n Men
100
hypothesisresultsinatstatisticof

sothatthenullofrandomassignmentcannotberejectedatthe10%level.Asimilarresultis
foundforwomen.

13.5.

(a) Thisisanexampleofattrition,whichposesathreattointernalvalidity.Afterthemale
athletesleavetheexperiment,theremainingsubjectsarerepresentativeofapopulationthat
excludesmaleathletes.Iftheaveragecausaleffectforthispopulationisthesameasthe
averagecausaleffectforthepopulationthatincludesthemaleathletes,thentheattritiondoes
notaffecttheinternalvalidityoftheexperiment.Ontheotherhand,iftheaveragecausal
effectformaleathletesdiffersfromtherestofpopulation,internalvalidityhasbeen
compromised.
(b) Thisisanexampleofpartialcompliancewhichisathreattointernalvalidity.Thelocalarea
networkisafailuretofollowtreatmentprotocol,andthisleadstobiasintheOLSestimatorof
theaveragecausaleffect.
(c) Thisposesnothreattointernalvalidity.Asstated,thestudyisfocusedontheeffectofdorm
roomInternetconnections.Thetreatmentismakingtheconnectionsavailableintheroom;the
treatmentisnottheuseoftheInternet.Thus,theartmajorsreceivedthetreatment(although
theychosenottousetheInternet).
(d) Asinpart(b)thisisanexampleofpartialcompliance.Failuretofollowtreatmentprotocol
leadstobiasintheOLSestimator.

13.7.

Fromthepopulationregression

Yit i 1 X it 2 ( Dt Wi ) 0 Dt vit ,

wehave

Yi 2 Yi1 1 ( X i 2 X i1 ) 2 [( D2 D1 ) Wi ] 0 ( D2 D1 ) (vi 2 vi1 ).

BydefiningYiYi2Yi1,XiXi2Xi1(abinarytreatmentvariable)anduivi2vi1,andusing
D10andD21,wecanrewritethisequationas
Yi 0 1 X i 2Wi ui ,

whichisEquation(13.5)inthecaseofasingleWregressor.

13.9.

Thecovariancebetween 1i X i andXiis

cov( 1i X i , X i ) E{[ 1i X i E ( 1i X i )][ X i E ( X i )]}

E{1i X i2 E ( 1i X i ) X i 1i X i E ( X i ) E ( 1i X i ) E ( X i )}
E ( 1i X i2 ) E (1i X i ) E ( X i )

BecauseXiisrandomlyassigned,Xiisdistributedindependentlyof1i.Theindependencemeans

E ( 1i X i ) E ( 1i ) E ( X i ) and E ( 1i X i2 ) E ( 1i ) E ( X i2 ).

Thus cov( 1i X i , X i ) canbefurthersimplified:

cov( 1i X i , X i ) E ( 1i )[ E ( X i2 ) E 2 ( X i )]
E ( 1i ) X2 .

So
cov( 1i X i , X i ) E ( 1i ) X2

E ( 1i ).
X2
X2

13.11. FollowingthenotationusedinChapter13,let1idenotethecoefficientonstatesalestaxinthe
firststageIVregression,andlet1idenotecigarettedemandelasticity.(Inbothcases,suppose
thatincomehasbeencontrolledforintheanalysis.)From(13.11)

p
E ( 1i 1i )
cov( 1i , 1i )
cov( 1i , 1i )
TSLS
E ( 1i )
Average Treatment Effect
,
E ( 1i )
E ( 1i )
E ( 1i )

wherethefirstequalityusestheusespropertiesofcovariances(equation(2.34)),andthesecond
equalityusesthedefinitionoftheaveragetreatmenteffect.Evidently,thelocalaveragetreatment
effectwilldeviatefromtheaveragetreatmenteffectwhen cov( 1i , 1i ) 0.Asdiscussedin

Section13.6,thiscovarianceiszerowhen1ior1iareconstant.Thisseemslikely.But,forthe
sakeofargument,supposethattheyarenotconstant;thatis,supposethedemandelasticitydiffers
fromstatetostate(1iisnotconstant)asdoestheeffectofsalestaxesoncigaretteprices( 1iisnot
constant).Are1iand1irelated?Microeconomicssuggeststhattheymightbe.Recallfromyour
microeconomicsclassthattheloweristhedemandelasticity,thelargerfractionofasalestaxis
passedalongtoconsumersintermsofhigherprices.Thissuggeststhat 1iand1iarepositively
related,sothat cov( 1i , 1i ) 0. BecauseE( )0,thissuggeststhatthelocalaveragetreatment
1i

effectisgreaterthantheaveragetreatmenteffectwhen 1ivariesfromstatetostate.

Chapter14
IntroductiontoTimeSeriesRegression
andForecasting
14.1.

(a) SincetheprobabilitydistributionofYtisthesameastheprobabilitydistributionofYt1
(thisisthedefinitionofstationarity),themeans(andallothermoments)arethesame.
(b) E(Yt)01E(Yt1)E(ut),butE(ut)0andE(Yt)E(Yt1).ThusE(Yt)01E(Yt),and
solvingforE(Yt)yieldstheresult.

14.3.

(a) Totestforastochastictrend(unitroot)inln(IP),theADFstatisticisthetstatistictesting
thehypothesisthatthecoefficientonln(IPt1)iszeroversusthealternativehypothesisthatthe
0.018
t
2.5714.
0.007
coefficientonln(IPt1)islessthanzero.Thecalculatedtstatisticis

FromTable14.4,the10%criticalvaluewithatimetrendis3.12.Because2.57143.12,
thetestdoesnotrejectthenullhypothesisthatln(IP)hasaunitautoregressiverootatthe10%
significancelevel.Thatis,thetestdoesnotrejectthenullhypothesisthatln(IP)containsa
stochastictrend,againstthealternativethatitisstationary.
(b) TheADFtestsupportsthespecificationusedinExercise14.2.Theuseoffirstdifferencesin
Exercise14.2eliminatesrandomwalktrendinln(IP).
E[(W c )2 ] E{[W W ) ( W c )]2 }
E[(W W ) 2 ] 2 E (W W )( W c) ( W c) 2

14.5.

W ( W c) .
(a)
(b) Usingtheresultinpart(a),theconditionalmeansquarederror
2

E[(Yt f t 1 ) 2 | Yt 1 , Yt 2 ,...] t2|t 1 (Yt |t 1 f t 1 ) 2

withtheconditionalvariance

t2|t 1 E[(Yt Yt |t 1 )2 ].

Thisequationisminimizedwhenthe

f Y .
secondtermequalszero,orwhen t 1 t |t 1 (Analternativeistousethehint,andnoticethat
theresultfollowsimmediatelyfromexercise2.27.)
(c) ApplyingEquation(2.27),weknowtheerrorutisuncorrelatedwithut1ifE(ut |ut1)0.
FromEquation(14.14)fortheAR(p)process,wehave
ut 1 Yt 1 0 1Yt 2 2Yt 3 L pYt p 1 f (Yt 1 , Yt 2 ,..., Yt p 1 ),

afunctionofYt1anditslaggedvalues.Theassumption E (ut |Yt 1 , Yt 2 ,...) 0 meansthat

conditionalonYt1anditslaggedvalues,oranyfunctionsofYt1anditslaggedvalues,uthas
meanzero.Thatis,

E (ut | ut 1 ) E[ut | f (Yt 1 , Yt 2 ,..., Yt p 2 )] 0.

Thusutandut1areuncorrelated.Asimilarargumentshowsthatutandutjareuncorrelated
forallj1.Thusutisseriallyuncorrelated.
14.7.

(a) FromExercise(14.1)E(Yt)2.50.7E(Yt1)E(ut),butE(Yt)E(Yt1)(stationarity)and
E(ut)0,sothatE(Yt)2.5/(10.7).Also,becauseYt2.50.7Yt1ut,var(Yt)
0.72var(Yt1)var(ut)20.7cov(Yt1,ut).Butcov(Yt1,ut)0andvar(Yt)var(Yt1)
(stationarity),sothatvar(Yt)9/(10.72)17.647.

(b) The1stautocovarianceis

cov(Yt , Yt 1 ) cov(2.5 0.7Yt 1 ut , Yt 1 )

0.7 var(Yt 1 ) cov(ut , Yt 1 )
0.7 Y2
0.7 17.647 12.353.

The2ndautocovarianceis
cov(Yt , Yt 2 ) cov[(1 0.7)2.5 0.72 Yt 2 ut 0.7ut 1 , Yt 2 ]
0.72 var(Yt 2 ) cov(ut 0.7ut 1 , Yt 2 )
0.72 Y2
0.72 17.647 8.6471.

(c) The1stautocorrelationis

corr (Yt , Yt 1 )

cov(Yt , Yt 1 )
var(Yt ) var(Yt 1 )

0.7 Y2
0.7.
Y2

The2ndautocorrelationis

corr (Yt , Yt 2 )

cov(Yt , Yt 2 )

var(Yt ) var(Yt 2 )

0.7 2 Y2
0.49.
Y2

(d) Theconditionalexpectationof YT 1 givenYTis

YT 1/T

2.50.7YT2.50.7102.374.11.

(a) E(Yt)0E(et)b1E(et1)bqE(etq)0[becauseE(et)0forallvaluesoft].

14.9.

var(Yt ) var(et ) b12 var(et 1 ) L bq2 var(et q )

2b1 cov(et , et 1 ) L 2bq 1bq cov(et q 1 , et q )
(b)

e2 (1 b12 L bq2 )
wherethefinalequalityfollowsfromvar(et) e foralltandcov(et,ei)0forit.
2

(c) Yt0etb1et1b2et2bqetqandYtj0etjb1et1jb2et2j
q q b b cov(et k , et j m ),
bqetqjandcov(Yt,Ytj) k 0 m 0 k m
whereb01.Noticethat
cov(etk,etjm)0foralltermsinthesum.

(d)

var(Yt ) e2 1 b12 , cov(Yt , Yt j ) e2b1 ,

cov(Yt , Yt j ) 0

and
forj1.

14.11. WritethemodelasYtYt101(Yt1Yt2)ut.Rearrangingyields

Yt0(11)Yt11Yt2ut.

Chapter15
EstimationofDynamicCausalEffects

15.1.

(a) Seethetablebelow.iisthedynamicmultiplier.Withthe25%oilpricejump,the
predictedeffectonoutputgrowthfortheithquarteris25ipercentagepoints.
Periodahead
(i)

Dynamic
multiplier
( i)

Predictedeffecton
outputgrowth(25 i)

95%confidence
interval25[ i1.96SE
( i)]

0.055

1.375

[4.021,1.271]

0.026
0.031

0.65
0.775

[3.443,2.143]
[3.127,1.577]

0.109
0.128
0.008

2.725
3.2
0.2

[4.783,0.667]
[5.797,0.603]

0.025

0.625

[1.025,1.425]
[1.727,2.977]

0.019
0.067

0.475
1.675

[2.386,1.436]
[0.015,0.149]

2
3
4
5
6
7
8

(b) The95%confidenceintervalforthepredictedeffectonoutputgrowthfortheithquarterfrom
the25%oilpricejumpis25[i1.96SE(i)]percentagepoints.Theconfidenceintervalis
reportedinthetablein(a).

(c) ThepredictedcumulativechangeinGDPgrowthovereightquartersis
25(0.0550.0260.0310.1090.1280.0080.0250.019)8.375%.

(d) The1%criticalvaluefortheFtestis2.407.SincetheHACFstatistic3.49islargerthanthe
criticalvalue,werejectthenullhypothesisthatallthecoefficientsarezeroatthe1%level.

15.3.

ThedynamiccausaleffectsareforexperimentA.Theregressioninexercise15.1doesnotcontrol
forinterestrates,sothatinterestratesareassumedtoevolveintheirnormalpatterngivenchanges
inoilprices.

15.5.

Substituting
X t X t X t 1
X t X t 1 X t 2
L L

X t X t 1 L X t p 1 X t p

intoEquation(15.4),wehave
Yt 0 1 X t 2 X t 1 3 X t 2 L r 1 X t r ut
0 1 ( X t X t 1 L X t r 1 X t r )
2 ( X t 1 L X t r 1 X t r )
L r ( X t r 1 X t r ) r 1 X t r ut
0 1 X t ( 1 2 ) X t 1 ( 1 2 3 ) X t 2
L ( 1 2 L r ) X t r 1
( 1 2 L r r 1 ) X t r ut .

ComparingtheaboveequationtoEquation(15.7),wesee 00,11,212,
3123,,andr112rr1.

15.7.

i
%
Write ut i 0 1 ut i

i | X t ) 0 foralliandt,E(u |X )0foralliandt,sothatX isstrictlyexogenous.

(a) Because E (u%
i
t
t
E (ut j | u%
%
t 1 ) 0
t 1 ) ut 1 sothatX is
(b) Because
forj0,Xtisexogenous.HoweverE(ut+1 | u%
t
notstrictlyexogenous.

15.9.

(a) Thisfollowsfromthematerialaroundequation(3.2).
t , andtheGLSestimatorof
(b) QuasidifferencingtheequationyieldsYt1Yt1(11)0 u%
1
T (Y Y )
(11)0isthemeanofYt1Yt1 T 1 t 2 t 1 t 1 .Dividingby(11)yieldstheGLS
estimatorof0.
(c) Thisisarearrangementoftheresultin(b).
1 T Y 1 (Y Y1 ) TT1 T11 Tt 21 Yt ,
0GLS T1 (YT Y1 ) T1 T11 Tt 21 Yt
(d) Write 0 T t 1 t T T
sothat 0
1
.
1
1
2
1 T 1 (YT Y1 )
andthevarianceisseentobeproportionalto T

Chapter16
AdditionalTopicsinTime
SeriesRegression

16.1.

Y followsastationaryAR(1)model, Yt 0 1Yt 1 ut . ThemeanofY is

t

and E (ut |Yt ) 0.

Y E (Yt )

0
,
1 1

(a) Thehperiodaheadforecastof

Yt , Yt h|t E (Yt h |Yt , Yt 1 ,K ),

is

Yt h|t E (Yt h |Yt ,Yt 1 ,K )

E ( 0 1Yt h 1 ut |Yt , Yt 1 ,K )
0 1Yt h 1|t
0 1 ( 0 1Yt h 2|t )
(1 1 ) 0 12Yt h 2|t
(1 1 ) 0 12 ( 0 1Yt h 3|t )
(1 1 12 ) 0 13Yt h 3|t
L L

1 1 L 1h 1 0 1hYt

1 1h
0 1hYt
1 1

Y 1h (Yt Y ).
(b) Substitutingtheresultfrompart(a)intoXtgives

X t iYt i |t i [ Y 1i (Yt Y )]
i 0

i 0

i 0

i 0

Y i (Yt Y ) ( 1 )i

16.3.

Y Y
Y
t
.
1 1 1

2
2
utfollowstheARCHprocesswithmeanE(ut)0andvariance t 1.0 0.5ut 1.

(a) ForthespecifiedARCHprocess,uthastheconditionalmean E (ut |ut 1 ) 0 andthe

conditionalvariance.

var (ut | ut 1 ) t2 1.0 0.5ut21 .

TheunconditionalmeanofutisE(ut)0,andtheunconditionalvarianceofutis

var (ut ) var[ E (ut |ut 1 )] E[var (ut | ut 1 )]

0 1.0 0.5E (ut21 )
1.0 0.5var (ut 1 ).
Thelastequationhasusedthefactthat E (ut ) var(ut ) E (ut )] var(ut ), whichfollows
becauseE(ut)0.Becauseofthestationarity,var(ut1)var(ut).Thus,var(ut)1.0
2

0.5var(ut)whichimplies var(ut ) 1.0 / 0.5 2.

2
2
(b) When ut 1 0.2, t 1.0 0.5 0.2 1.02. Thestandarddeviationofutist1.01.Thus

3 ut
3

1.01 t 1.01
(2.9703) (2.9703) 0.9985 0.0015 0.9970.

Pr ( 3 ut 3) Pr

2
2
Whenut12.0, t 1.0 0.5 2.0 3.0. Thestandarddeviationofutist1.732.Thus

u
3
3
t

1.732 t 1.732
(1.732) (1.732) 0.9584 0.0416 0.9168.

Pr ( 3 ut 3) Pr

16.5.

Because Yt Yt Yt 1 Yt 1 Yt 1 Yt ,
T

t 1

t 1

t 1

t 1

t 1

Yt 2 (Yt 1 Yt )2 Yt 21 (Yt )2 2Yt 1Yt .

So
1 T
1 1
Yt 1Yt T 2
T t 1

Notethat

Y
t 1

T
T

Yt 21 (Yt ) 2 .
t 1
t 1

Tt 1 Yt 2 Tt 1 Yt 21 Tt 11 Yt 2 YT2 Y02 Tt 11 Yt 2 Y 2 Y 2 Y 2
T
0
T becauseY 0.Thus:
0

1 T
1 1 2 T

YT (Yt )2

t 1
t
T t 1
T 2
t 1

1 YT
1 T

(Yt ) 2 .

2 T
T t 1

Y Xt
t 1 t

16.7.

T
t 1

X t2

Y Y

Y
T

t 1 t
T
t 1

t 1

t 1

1 T
t 1Yt Yt 1
T
.
1 T
2

Y
t 1
T t 1
Followingthehint,thenumeratoristhesame

expressionas(16.21)(shiftedforwardintime1period),sothat
1

denominatoris T
directly.
16.9.

Tt 1 (Yt 1 ) 2 T1 Tt 1 ut21 u2

1
T

d
Tt 1 Yt Yt 1

u2
2

( 12 1).

The

(a) Fromthelawofiteratedexpectations

bythelawoflargenumbers.Theresultfollows

E (ut2 ) E t2

E 0 1ut21
0 1 E ut21
0 1 E ut2

2
wherethelastlineusesstationarityofu.Solvingfor E (ut ) givestherequiredresult.

(b) Asin(a)
E (ut2 ) E t2

E 0 1ut21 2ut2 2 L put2 p

0 1 E ut21 2 E ut2 2 L p E ut2 p

0 1 E ut2 2 E ut2 L p E ut2

sothat

E (ut2 )

0
1 tp1 i .

2
(c) Thisfollowsfrom(b)andtherestrictionthat E (ut ) >0.
(d) Asin(a)

E (ut2 ) E t2

0 1 E ut21 1 E t21
0 (1 1 ) E ut21
0 (1 1 ) E ut2

0
1 1 1

(e) Thisfollowsfrom(d)andtherestrictionthat

E ut2 0.

Chapter17
TheTheoryofLinearRegression
withOneRegressor
17.1.

(a) Supposetherearenobservations.Letb1beanarbitraryestimatorof1.Giventhe
estimatorb1,thesumofsquarederrorsforthegivenregressionmodelis
n

(Y b X ) .
i 1

1RLS , therestrictedleastsquaresestimatorof ,minimizesthesumofsquarederrors.That

1
RLS
is, 1 satisfiesthefirstorderconditionfortheminimizationwhichrequiresthedifferential
ofthesumofsquarederrorswithrespecttob1equalszero:

2(Y b X )( X ) 0.
i 1

Solvingforb1fromthefirstorderconditionleadstotherestrictedleastsquaresestimator

XY
1RLS i n1 i 2 i .
i 1 X i
n

1RLS isunbiased.Wecanrepresenttherestrictedleastsquaresestimator
(b) Weshowfirstthat
1RLS intermsoftheregressorsanderrors:

n X Y n X ( X ui )
n X u
1RLS i n1 i 2 i i 1 i n 1 2i
1 i n1 i 2 i .
i 1 X i
i 1 X i
i 1 X i

Thus

in1 X i ui
in1 X i E (ui | X 1,K , X n )

1
n
2
in1 X i2
i 1 X i

E ( 1RLS ) 1 E

1 ,

wherethesecondequalityfollowsbyusingthelawofiteratedexpectations,andthethird
equalityfollowsfrom

in1 X i E (ui | X 1 ,K , X n )
0
in1 X i2

becausetheobservationsarei.i.d.andE(ui |Xi)0.(Note,E(ui |X1,,Xn)E(ui |Xi)because

theobservationsarei.i.d.

 RLS
Underassumptions13ofKeyConcept17.1, 1 isasymptoticallynormallydistributed.
RLS
Thelargesamplenormalapproximationtothelimitingdistributionof 1 followsfrom
considering
1
n X u
n X u
1RLS 1 i n1 i 2 i n1 i n1 i 2 i .
i 1 X i
n i 1 X i

ConsiderfirstthenumeratorwhichisthesampleaverageofviXiui.Byassumption1ofKey
Concept17.1,v hasmeanzero: E ( X i ui ) E[ X i E (ui | X i )] 0. Byassumption2,v isi.i.d.By
i

assumption3,var(vi)isfinite.Let
theorem,thesampleaverage

v / v

v
1
n

X i ui , then /n.

n
i 1

2
v

v
n
i 1

2
v

Usingthecentrallimit

N (0, 1)

or

1 n
d
X i ui
N (0, v2 ).

n i 1
2

Forthedenominator, X i isi.i.d.withfinitesecondvariance(becauseXhasafinitefourth
moment),sothatbythelawoflargenumbers

1 n 2 p
X i E ( X 2 ).

n i 1
CombiningtheresultsonthenumeratorandthedenominatorandapplyingSlutskystheorem
leadto

n ( 1RLS u )

1
n
1
n

in1 X i ui

n
i 1

2
i

var( X i ui )
d

N 0,
.
E( X 2 )

RLS
(c) 1 isalinearestimator:

n X Y
n
1RLS i n1 i 2 i i 1 aiYi ,
i 1 X i

where ai

Xi
.
in1 X i2

Theweightai(i1,,n)dependsonX1,,XnbutnotonY1,,Yn.

Thus

 Xu
1RLS 1 i n1 i 2 i .
i 1 X i
n

1RLS isconditionallyunbiasedbecause

n X u
E ( 1RLS | X 1 ,K , X n E 1 i n1 i 2 i | X 1 ,K , X n
i 1 X i

n
Xu

1 E i n1 i 2 i |X 1 ,K , X n 1 .
i 1 X i

Thefinalequalityusedthefactthat

in1 X i ui

in1 X i E (ui | X 1 ,K , X n )
|
X
,
K
,
X

0
1
n
n
2
in1 X i2
i 1 X i

becausetheobservationsarei.i.d.andE(ui |Xi)0.

RLS
(d) Theconditionalvarianceof 1 , givenX1,,Xn,is

n X u
var( 1RLS | X1,K , X n ) var 1 i n1 i 2 i | X1 ,K , X n
i 1 Xi

n
2
X var(u | X ,K , X n )
i 1 i n i 2 12
( i 1 Xi )

in1 X i2 u2
( in1 Xi2 )2

2
u
n
2
i 1
i

(e) TheconditionalvarianceoftheOLSestimator 1 is

var( 1 |X1 ,K , X n )

u2
.
in1 ( X i X )2

Since
n

i 1

i 1

i 1

i 1

i 1

( X i X )2 X i2 2 X X i nX 2 X i2 nX 2 X i2 ,

RLS
theOLSestimatorhasalargerconditionalvariance: var( 1 |X 1 ,K , X n ) var( 1 |X 1 ,K , X n ).
RLS
Therestrictedleastsquaresestimator 1 ismoreefficient.

 RLS
(f) Underassumption5ofKeyConcept17.1,conditionalonX1,,Xn, 1 isnormally
distributedsinceitisaweightedaverageofnormallydistributedvariablesui:
Xu
1RLS 1 i n1 i 2 i .
i 1 X i
n

 RLS
Usingtheconditionalmeanandconditionalvarianceof 1 derivedinparts(c)and(d)
RLS
respectively,thesamplingdistributionof 1 ,conditionalonX ,,X ,is
1

1RLS ~ N 1 , n u 2 .
i 1 X i

(g) Theestimator

in1 Yi
in1 ( 1 X i ui )
in1 ui
%

1
1
in1 X i
in1 X i
in1 X i

Theconditionalvarianceis

in1 ui
var( %
|
X
,
K
,
X
)

var

| X 1 ,K , X n

1
1
n
1
n
i 1 X i

n
var(ui | X 1 ,K , X n )
i 1
( in1 X i ) 2

n u2
.
( in1 X i ) 2

%
RLS
Thedifferenceintheconditionalvarianceof 1 and 1 is

RLS | X ,K , X )
var( %
1 | X 1 ,K , X n ) var( 1
1
n

n u2
2
n u 2.
2
( X i )
i 1 X i
n
i 1

%
RLS
Inordertoprove var( 1| X 1 ,K , X n ) var( 1 | X 1 ,K , X n ), weneedtoshow

n
1
n
2
( X i )
i 1 X i2
n
i 1

orequivalently

i 1

X i .

i 1

n X i2

ThisinequalitycomesdirectlybyapplyingtheCauchySchwartzinequality

( ai bi )
i 1

i 1

i 1

i 1

i 1

i 1

ai2 bi2

whichimplies

X i 1 Xi
i 1 i 1
n

12 X i2 n X i2 .

n
2
n
2
%
RLS
Thatis ni 1 X i ( x 1 X i ) , or var( 1| X 1 ,K , X n ) var( 1 | X 1 ,K , X n ).

%
Note:because 1 islinearandconditionallyunbiased,theresult
RLS | X ,K , X )
var( %
1 | X 1 ,K , X n ) var( 1
1
n followsdirectlyfromtheGaussMarkovtheorem.

17.3.

(a) UsingEquation(17.19),wehave

1
n ( X X )ui
n ( 1 1 ) n n1 in1 i
i 1 ( X i X )2
n

1
n

in1[( Xi X ) ( X X )]ui
n
2
1
n i 1 ( X i X )

1
n

in1 ( X i X )ui

1
n

in1 ( X i X )2
1
n

1
n

in1 vi

in1 ( X i X )2

(X X )
1
n

in1 ui

in1 ( X i X )2

( X X )
1
n

1
n

1
n

in1 ui

in1 ( X i X )2

bydefiningvi(XiX)ui.
2
(b) Therandomvariablesu1,,unarei.i.d.withmeanu0andvariance 0 u . Bythe
centrallimittheorem,

n (u u )

1
n

in1 ui

N (0, 1).

X X 2 , or X X 0.
Thelawoflargenumbersimplies
Bytheconsistencyofsample
2
1 n

(
X

X
)
variance, n i 1 i
convergesinprobabilitytopopulationvariance,var(Xi),whichis
finiteandnonzero.TheresultthenfollowsfromSlutskystheorem.
p

(c) Therandomvariablevi(XiX)uihasfinitevariance:
var(vi ) var[( X i X ) i ]
E[( X i X ) 2 ui2 ]
E[( X i X ) 4 ]E[(ui ) 4 ] .
TheinequalityfollowsbyapplyingtheCauchySchwartzinequality,andthesecondinequality
followsbecauseofthefinitefourthmomentsfor(Xi,ui).Thefinitevariancealongwiththefact
thatvihasmeanzero(byassumption1ofKeyConcept15.1)andviisi.i.d.(byassumption2)
impliesthatthesampleaverage v satisfiestherequirementsofthecentrallimittheorem.Thus,

1
n

in1 vi

satisfiesthecentrallimittheorem.

(d) Applyingthecentrallimittheorem,wehave

1
n

in1 vi

N (0, 1).

Becausethesamplevarianceisaconsistentestimatorofthepopulationvariance,wehave
1
n

in1 ( X i X ) 2 p
1.
var( X i )

UsingSlutskystheorem,

in1 vt
v
d

N (0,1),
n
2
1

(
X

X
)
i 1
t
n
X2
1
n

orequivalently

1
n

in1 vi

var(vi )
d

N 0,
.
(Xi X )
[var( X i )]2

1
n

n
i 1

Thus

n ( 1 1 )

1
n
1
n

in1 vi

in1 ( X i X )2

( X X )
1
n

1
n

in1 ui

in1 ( X i X )2

var(vi )
d

N 0,

[var( X i )]2

sincethesecondtermfor n ( 1 1 ) convergesinprobabilitytozeroasshowninpart(b).

17.5.

17.7.

BecauseE(W 4)[E(W2)]2var(W2),[E(W2)]2E(W 4).ThusE(W2)<.

(a) Thejointprobabilitydistributionfunctionofui,uj,Xi,Xjisf(ui,uj,Xi,Xj).Theconditional
probabilitydistributionfunctionofuiandXigivenujandXjisf(ui,Xi |uj,Xj).Sinceui,Xi,i
1,,narei.i.d.,f(ui,Xi |uj,Xj)f(ui,Xi).Bydefinitionoftheconditionalprobability
distributionfunction,wehave

f (ui , u j , X i , X j ) f (ui , X i | u j , X j ) f (u j , X j )
f (ui , X i ) f (u j , X j ).

(b) TheconditionalprobabilitydistributionfunctionofuiandujgivenXiandXjequals

f (ui , u j | X i , X j )

f (ui , u j , X i , X j )
f (Xi , X j )

f (ui , X i ) f (u j , X j )
f (Xi ) f (X j )

f (ui | X i ) f (u j | X j ).

Thefirstandthirdequalitiesusedthedefinitionoftheconditionalprobabilitydistribution
function.Thesecondequalityusedtheconclusionthefrompart(a)andtheindependence
betweenXiandXj.Substituting

f (ui , u j | Xi , X j ) f (ui | X i ) f (u j | X j )

intothedefinitionoftheconditionalexpectation,wehave

E (ui u j | X i , X j ) ui u j f (ui , u j |X i , X j ) dui du j

ui u j f (ui | X i) f (u j | X j )dui du j
ui f (ui | X i) dui u j f (u j | X j ) du j
E (ui | X i ) E (u j | X j ).

(c) LetQ(X1,X2,,Xi1,Xi+1,,Xn),sothatf(ui|X1,,Xn)f(ui |Xi,Q).Write

f (ui , X i , Q)
f ( X i , Q)

f (ui | X i , Q)

f (ui , X i ) f (Q )
f ( X i ) f (Q)

f (ui , X i )
f (Xi )

f (ui | X i )
wherethefirstequalityusesthedefinitionoftheconditionaldensity,thesecondusesthefact
that(ui,Xi)andQareindependent,andthefinalequalityusesthedefinitionoftheconditional
density.Theresultthenfollowsdirectly.

(d) Anargumentlikethatusedin(c)implies

f (ui u j | X i , K X n ) f (ui u j | X i , X j )
andtheresultthenfollowsfrompart(b).

17.9.

Weneedtoprove

1 n
p
[( X i X )2 ui2 ( X i X )2 ui2 ] 0.
n i 1
Usingtheidentity X X ( X X ),

1 n
1 n
1 n
[( X i X ) 2 ui2 ( X i X ) 2 ui2 ] ( X X ) 2 ui2 2( X X ) ( X i X )ui2

n i 1
n i 1
n i 1
n
1
( X i X ) 2 (ui2 ui2 ).
n i 1

Thedefinitionof ui implies

ui2 ui2 ( 0 0 ) 2 ( 1 1 )2 X i2 2ui ( 0 0 )

2ui ( 1 1 ) X i 2( 0 0 )(1 1 ) X i .
1

Substitutingthisintotheexpressionfor n

in1[( X i X ) 2 ui2 ( X i X ) 2 ui2 ]

p

yieldsaseriesofterms

b X u
eachofwhichcanbewrittenasanbnwhere an 0 and n
whererandsare

integers.Forexample, an ( X X ), an ( 1 1 ) andsoforth.Theresultthenfollowsfrom
1

Slutksystheoremif n

in1 X ir uis d

1
n

n
i 1

r s
i i

r s
wheredisafiniteconstant.Let wi X i ui andnotethatwi

isi.i.d.Thelawoflargenumberscanthenbeusedforthedesiredresultif E ( wi ) . Thereare
twocasesthatneedtobeaddressed.Inthefirst,bothrandsarenonzero.Inthiscasewrite
2

E ( wi2 ) E ( X i2 r ui2 s ) [ E ( X i4 r )][ E (ui4 s )]

andthistermisfiniteifrandsarelessthan2.Inspectionofthetermsshowsthatthisistrue.In
thesecondcase,eitherr0ors0.Inthiscasetheresultfollowsdirectlyifthenonzero
exponent(rors)islessthan4.Inspectionofthetermsshowsthatthisistrue.

17.11. Note:inearlyprintingofthethirdeditiontherewasatypographicalerrorintheexpressionfor Y|X.

Y ( XY / X2 )( x X )
Thecorrectexpressionis Y | X
.
(a) Usingthehintandequation(17.38)
fY | X x ( y )

1
2
(1 XY
)
2
Y

x
x X
1
X

exp
2 XY

2
2(1 XY ) X
X

y Y
y Y

Y
Y

2
1 x X

.
2 X

Simplifyingyieldsthedesiredexpression.
(b) TheresultfollowsbynotingthatfY|X=x(y)isanormaldensity(seeequation(17.36))withT|
Y2|X
2
and

.
X
(c) LetbXY/ X andaYbX.
2

17.13

(a) Theanswerisprovidedbyequation(13.10)andthediscussionfollowingtheequation.
TheresultwasalsoshowninExercise13.10,andtheapproachusedintheexerciseis
discussedinpart(b).

(b) WritetheregressionmodelasYi01Xivi,where0E(0i),1E(1i),andviui
(0i0)(1i1)Xi.Noticethat
E(vi|Xi)E(ui|Xi)E(0i0|Xi)XiE(1i1|Xi)0
because0iand1iareindependentofXi.BecauseE(vi|Xi)=0,theOLSregressionofYionXi
willprovideconsistentestimatesof0E(0i)and1E(1i).Recallthattheweightedleast
squaresestimatoristheOLSestimatorofYi/ionto1/iandXi/i,where
Writethisregressionas

i 0 1 X i2

Yi / i 0 (1 / i ) 1 ( X i / i ) vi / i .

Thisregressionhastworegressors,1/iandXi/i.Becausetheseregressorsdependonlyon
Xi,E(vi|Xi)0impliesthatE(vi/i|(1/i),Xi/i)0.Thus,weightedleastsquaresprovidesa
consistentestimatorof0E(0i)and1E(1i).

Chapter18
TheTheoryofMultipleRegression
18.1.

(a) Theregressioninthematrixformis
YX U
with
1 Income1

1 Income 2
X
M
M

1 Income n

TestScore1

TestScore 2

Y
,

TestScore n
U1

U
U 2 ,
M

U n

Income12

Income 22
M

Income 2n

0

1 .

2

(b) ThenullhypothesisisH0:R rversusH1:Rr,with

R = (0 0 1) and r = 0.

TheheteroskedasticityrobustFstatistictestingthenullhypothesisis

F ( R r) R R

( R r)/q

Withq1.Underthenullhypothesis,
d
F
Fq ,

WerejectthenullhypothesisifthecalculatedFstatisticislargerthanthecriticalvalueofthe
Fq ,
distributionatagivensignificancelevel.
Var (Q) E[(Q Q ) 2 ]
E[(Q Q )(Q Q )]
E[(cW c W )(cW c W )]
cE[(W W ) ( W W )]c

18.3.

c var( W ) c c w c
(a)
wherethesecondequalityusesthefactthatQisascalarandthethirdequalityusesthefact
thatQc w.

(b) Becausethecovariancematrix W ispositivedefinite,wehave c wc 0 foreverynon

zerovectorfromthedefinition.Thus,var(Q)>0.Boththevectorcandthematrix W are

finite,sovar(Q) c wc isalsofinite.Thus,0<var(Q)<.

18.5.

PXX(XX)1X,MXInPX.
(a)PXisidempotentbecause

PXPXX(XX)1XX(XX)1X X(XX)1XPX.
MXisidempotentbecause
M X M X (I n PX ) (I n PX ) I n PX PX PX PX
I n 2PX PX I n PX M X

PXMX0nxnbecause

PX M X PX (I n PX ) PX PX PX PX PX 0n n

1
(b) Because ( X X) X Y, wehave
X X (XX )1 X Y P Y
Y
X
whichisEquation(18.27).Theresidualvectoris

YY
Y P Y (I P ) Y M Y.
U
X
n
X
X
WeknowthatMXXisorthogonaltothecolumnsofX:
MXX(InPX)XXPXXXX(XX)1XXXX0
sotheresidualvectorcanbefurtherwrittenas

M Y M ( X U ) M X M U M U
U
X
X
X
X
X
whichisEquation(18.28).
18.7.

(a) Wewritetheregressionmodel,Yi1Xi2Wiui,inthematrixformas
YXWU
with
Y1

Y
Y 2 ,
M

Yn

X
1

X
X 2 ,
M

X
n

W1

W
W 2 ,
M

Wn

1 ,

u1

u2

,
M

un

2 .

TheOLSestimatoris
1
1
X X XW X Y

W X WW
WY
2
1

X X X W X U
1

W X W W W U
2
X X
WX

1

2

1
n
1
n

1
2

in1 X i2
n
1
n i 1 Wi X i
1
n

1
n
1
n

X W

W W
1
n

1
n
1
n

X U

W U

in1 X iWi
n
2
1
n i 1 Wi

in1 X i ui
1 n

W u
n i 1 i i
1
n

Bythelawoflargenumbers n

p
p
in1 X i2
E ( X 2 ); 1n ni 1 Wi 2
E (W 2 );

p
in1 X iWi

n
p
1
E ( XW ) 0 (becauseXandWareindependentwithmeansofzero); n i 1 X i ui E ( Xu ) 0
p
in1 X i ui
E ( Xu ) 0

(becauseXanduareindependentwithmeansofzero); n

Thus

1
1 p 1
0
E( X 2 )
0

2

0
E (W )
E (Wu )
2

2
1

.
2 EE ((WWu2 ))

E (Wu )
p
2
2
2
E (W 2 )
(b) Fromtheanswerto(a)
ifE(Wu)isnonzero.
(c) ConsiderthepopulationlinearregressionuiontoWi:

uiWiai
whereE(Wu)/E(W2).Inthispopulationregression,byconstruction,E(aW)0.Usingthisequationfor
uirewritetheequationtobeestimatedas
Yi X i 1 Wi 2 ui
X i 1 Wi ( 2 ) ai
X i 1 Wi ai

where 2 . Acalculationlikethatusedinpart(a)canbeusedtoshowthat

n ( 1 1 )

n ( 2 )

in1 X i2
1
in1 Wi X i
n
1
n

E( X 2 )

1
n

in1 X iWi

1
in1 Wi 2
n
0

E (W )
2

S1

S 2

in1 X i ai

1 in1 Wu ai
n

1
n

whereS1isdistributed N (0, a E ( X 2 )). ThusbySlutskystheorem

2

a2
d
n ( 1 1 )
N 0,

E ( X 2 )

NowconsidertheregressionthatomitsW,whichcanbewrittenas:
Yi X i 1 d i

wherediWiai.Calculationslikethoseusedaboveimplythat

d2
d
n 1r 1
N 0,
.
E ( X 2 )

2
2
2
2
r
Since d a E (W ), theasymptoticvarianceof 1 isneversmallerthantheasymptotic

varianceof 1 .

( XM W X)1 XM W Y
( XM W X) 1 XM W ( X W U )

18.9.

(a)

( XM W X) 1 XM W U.

ThelastequalityhasusedtheorthogonalityMWW0.Thus

( XM W X)1 XM W U (n 1 XM W X)1 (n 1 XM W U ).
(b) UsingMWInPWandPWW(WW)1Wwecanget
n 1XM W X n1X(I n PW )X
n 1XX n 1XPW X
n 1XX ( n 1XW)( n 1W W ) 1 ( n 1WX).
1
n X X .
n 1XX 1n in1 X i Xi .
Firstconsider
The(j,l)elementofthismatrixis n i 1 ji li By
Assumption(ii),Xiisi.i.d.,soXjiXliisi.i.d.ByAssumption(iii)eachelementofXihasfour
moments,sobytheCauchySchwarzinequalityXjiXlihastwomoments:

E ( X 2ji X li2 ) E ( X 4ji ) E ( X li4 ) .

1
n X X
BecauseXjiXliisi.i.d.withtwomoments, n i 1 ji li obeysthelawoflargenumbers,so
1 n
p
X ji X li E ( X ji X li ) .

n i 1

Thisistrueforalltheelementsofn1XX,so

n 1XX

1 n
Xi Xi p E (Xi Xi ) XX. .
n i 1

ApplyingthesamereasoningandusingAssumption(ii)that(Xi,Wi,Yi)arei.i.d.and
Assumption(iii)that(Xi,Wi,ui)havefourmoments,wehave

1 n
p
Wi Wi E ( Wi Wi ) WW ,

n i 1
1 n
p
n 1 XW Xi Wi E ( Xi Wi ) XW ,
n i 1

n 1WW

and

n 1 WX

1 n
p
Wi Xi E ( Wi Xi ) WX .

n i 1

FromAssumption(iii)weknow XX , WW , XW , and WX areallfinitenonzero,Slutskys

theoremimplies
n 1XM W X n1XX ( n 1XW ) (n1W W )1 ( n1W X)
p

XX XW -1WW WX
whichisfiniteandinvertible.
(c) Theconditionalexpectation
E (u1| X, W )

E (u2 | X, W )

E (U|X, W )

E (un | X, W)
W1 W
1

W
W2
2

M M

Wn W
n

E (u1| X1 , W 1 )

E (u2 | X 2 , W2)

E (un | X n , W n )
W .

ThesecondequalityusedAssumption(ii)that ( X i , Wi , Yi ) arei.i.d.,andthethirdequality
appliedtheconditionalmeanindependenceassumption(i).
(d) Inthelimit
p
n 1 XM W U
E ( XM W U|X, W) XM W E (U|X, W) XM W W 0 k1 1

because M W W 0.
1
1

(e) n X M W X convergesinprobabilitytoafiniteinvertiblematrix,and n X M W U converges

inprobabilitytoazerovector.ApplyingSlutskystheorem,
p
(n 1XM W X) -1 (n1XM W U )
0.

Thisimplies
p

.

18.11.

(a) UsingthehintC[Q1Q2]

Ir
0

0
0

Q1 '
Q '
2

,whereQQI.TheresultfollowswithAQ1.

(b) WAVN(A0,AInA)andtheresultfollowsimmediately.
(c) VCVVAAV(AV)(AV)WWandtheresultfollowsfrom(b).
18.13.

(a) ThisfollowsfromthedefinitionoftheLagrangian.
(b) Thefirstorderconditionsare

%
(*)X(YX )R 0
and

%
(**)R r0
Solving(*)yields

%
(***) (XX)1R .

MultiplyingbyRandusing(**)yieldsrR R(XX)1R ,sothat

[R(X X)1R ]1(R r).

Substitutingthisinto(***)yieldstheresult.
%

(c) Usingtheresultin(b),YX (YX )X(XX)1R[R(XX)1R]1(R r), sothat

%
%

(YX ) (Y X )(Y X )(YX )(R r) [R(X X)1R ]1(R r)

2(YX )X(XX)1R[R(XX)1R]1(R r).

But(YX )X0,sothelasttermvanishes,andtheresultfollows.

(d) Theresultin(c)showsthat(R r)[R(XX)1R]1(R r)SSRRestrictedSSRUnrestricted.Also

su2 SSR

Unrestricted

18.15.

/(nkUnrestricted1),andtheresultfollowsimmediately.

(a) Thisfollowsfromexercise(18.6).

% % %
(b) Yi Xi u i ,sothat

%' X
%
X

i
i
i 1

1 n

%' X
%
X

i
i
i 1

1 n

%' X
%
X

i
i
i 1

1 n

1 n

%' X
%
X

i
i
i 1

X%' u%
i 1

X ' M ' Mu
i 1

X ' M 'u
i 1

X%' u
i 1

 X% 1n in1 (T 1 Tt 1 ( X it X i ) 2 ),
Q

where (T t 1 ( X it X i ) ) arei.i.d.withmean X%and

finitevariance(becauseXithasfinitefourthmoments).Theresultthenfollowsfromthelawof
largenumbers.
(d) ThisfollowstheCentrallimittheorem.
(e) ThisfollowsfromSlutskystheorem.
(c)

2
(f) i arei.i.d.,andtheresultfollowsfromthelawoflargenumbers.
1/ 2 %
1/ 2
% %

(g) Let i T X i ' u%i i T ( ) X i ' X i .Then

%' u% 2 T 1 ( )2 ( X
%' X
%)2 2T 1/ 2 ( ) X
% %
i2 T 1/2 X
i
i
i
i
i
i i ' Xi
1
%' X
%) 2 2T 1/ 2 ( ) 1 n X
% %
in1 i2 in1 i2 T 1 ( )2 1n in1 ( X
i
i
i 1 i i ' X i
n
n
and
1
n

p
p
1

n ( X%' X%)2 E[( X%i ' X%i ) 2 ]

Because ( ) 0 ,theresultfollowsfrom(a) n i 1 i i
and(b)
1
n

%
% %
in1 i X%
i ' X i E (i X i ' X i ).
p

Both(a)and(b)followfromthelawoflargenumbers;both
(a)and(b)areaveragesofi.i.d.randomvariables.Completingtheproofrequiresverifying

% %2

% %

that ( Xi ' Xi ) hastwofinitemomentsand i Xi ' Xi hastwofinitemoments.Theseinturn

followfrom8momentassumptionsfor(Xit,uit)andtheCauchySchwartzinequality.
Alternatively,astronglawoflargenumberscanbeusedtoshowtheresultwithfinite
fourthmoments.
18.17 Theresultsfollowfromthehintsandmatrixmultiplicationandaddition.