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    Students Tutorial Answers Week12

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    The document provides sample solutions to tutorial exercises on regression analysis using used car price and age data. It discusses interpreting regression output, calculating confidence intervals, testing coefficients, and the advantages of multiple regression over simple regression. Specifically, multiple regression improves predictive performance by including all relevant variables and avoids omitted variable bias from excluded variables correlated with those included.

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    Students Tutorial Answers Week12

    Uploaded by

    HeoHamHố
    449 views8 pages
    The document provides sample solutions to tutorial exercises on regression analysis using used car price and age data. It discusses interpreting regression output, calculating confidence intervals, testing coefficients, and the advantages of multiple regression over simple regression. Specifically, multiple regression improves predictive performance by including all relevant variables and avoids omitted variable bias from excluded variables correlated with those included.

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    Students Tutorial Answers Week12 ECON1203 UNSW

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    The document provides sample solutions to tutorial exercises on regression analysis using used car price and age data. It discusses interpreting regression output, calculating confidence intervals, testing coefficients, and the advantages of multiple regression over simple regression. Specifically, multiple regression improves predictive performance by including all relevant variables and avoids omitted variable bias from excluded variables correlated with those included.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    449 views8 pages

    Students Tutorial Answers Week12

    Uploaded by

    HeoHamHố
    The document provides sample solutions to tutorial exercises on regression analysis using used car price and age data. It discusses interpreting regression output, calculating confidence intervals, testing coefficients, and the advantages of multiple regression over simple regression. Specifically, multiple regression improves predictive performance by including all relevant variables and avoids omitted variable bias from excluded variables correlated with those included.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    BES Tutorial Sample Solutions, S2,2010

    It will be posted on BES website with one week delay.


    WEEK 12 TUTORIAL EXERCISES (To be discussed in the week starting
    October 11)
    1. RecalltheAnzacGaragedata(ANZACG.XLS)usedinWeek3,question
    7,whereweconsideredthesimplelinearregressionmodelgivenby:

    whereprice=usedcarpriceindollarsandage=ageofthecarinyears.
    The EXCEL results obtained using Ordinary Least Squares are
    presentedbelow:

    RegressionStatistics

    R 2
    0.077

    StandardError 42069

    Observations
    117

    CoefficientsStandardError tStat pvalue


    Intercept
    47469
    6748
    7.035 0.000
    Age
    2658
    856
    3.106 0.002

    (a) Interpret the tStat and the pvalues in the EXCEL output.
    Whatdoyouneedtoassume?
    Thetstat&pvaluesintheEXCELoutputarederivedfromtwotailtestswith
    nullhypothesesthattheassociatedpopulationparameterequalsto0.Hence,
    larger tstats and lower pvalues mean we are more confident that the
    associatedpopulationparameterisnonzero.Here,pvaluesforbothintercept
    and Age coefficients are below 1% &, hence we can be confident that both
    populationparametersarestatisticallysignificant(nonzero).

    Weneedtoassumethedisturbancesarenormalorbecausethesamplesizeis
    largeinvoketheCLT.
    1


    (b) Calculatea95%confidenceintervalforthecoefficientonage.

    Standardnormalcriticalvalueis1.96hence95%confidenceintervalis:

    26581.96856=26581678=(4336,980)

    (c) InterprettheR2value.

    Theregressionmodelincludingageexplains7.7%ofthevariationinusedcar
    prices.

    (d) TestwhethertheestimatedcoefficientofAgeissignificantlyless
    thanzeroatthe5%levelofsignificance.

    Unlikein(a)thisisaonetailedtest:

    H0: 1=0; H1: 1< 0


    Decisionrule:RejectH0ifb1/se(b1)<1.645
    Teststatistic:b1/se(b1)=3.106<1.645andhencerejectH0

    (e) Estimate a 95% confidence interval for the mean price for a
    secondhandpassengercarthatis10yearsoldandinterpretthe
    result?Note:thesamplemeanofageis6.44years.

    A10yearoldcarisexpectedtobevaluedat$47469102658=20889.
    Boundariesofconfidenceintervalforthispredictioncanbefoundby:

    1
    ,

    wheres=42069,se(b1)=856andhence
    42069
    856

    2415

    Hence:
    20889

    1.98

    42069

    1
    117

    10

    6.44
    2415

    20889

    9783

    Weare95%confidentthatthepriceofa10yearoldcarwillfallbetween
    $11,106 and $30,672. While the impact of age on price is precisely
    estimated, the CI is quite wide because of the large amount of
    unexplainedvariationthatisindicatedbytheverylowR2valuereported.
    (Note: use of normal critical values here would be acceptable given the
    large sample size and would make little practical difference as the
    criticalvaluewouldbe1.96ratherthan1.98)

    Anzac Garages pricing scheme based on the age of the car is not
    workingoutverywell.Whenitssecondhandcarsarecomparedwith
    cars of the same age from other dealers, prices often diverge. One of
    their consultants noted that the value of a secondhand car should
    dependonboththeOdometerreadingaswellastheAgeofthevehicle.
    This consultant wanted to estimate the following two simple linear
    regressionmodelsseparately:

    whereOdometer=distancethecarhastravelledsinceleavingfactory
    in kilometers. A senior consultant advised use of a multiple linear
    regressionmodelinstead:

    (f) Discuss why the simple linear regression methods may not be
    preferable to the multiple regression method, in general, and in
    the context of this problem. The resultant OLS estimates for the
    multipleregressionmodelgivenbelow:

    Thepredictiveperformanceofthemodelwillimproveasrelevantvariablesare
    addedtoasimpleregressionmodel.

    Alsotheassumptionthatthedisturbanceisuncorrelatedwiththeexplanatory
    variables is critical for the unbiased estimation of coefficients of included
    variables.Inthesimplepriceonageregressionitwillbeviolatedifvariables
    affecting price and correlated with age have been omitted from the model.
    Thisislikelytobethecaseherewithdistancethecarhastraveled.

    We see the R2 has improved (approximately doubled) with the addition of


    odometerandthecoefficientonageisnowmuchsmallerinmagnitudeandis
    nowstatisticallyinsignificant.

    SUMMARYOUTPUT

    RegressionStatistics

    RSquare
    0.150

    StandardError40568

    Observations 117

    CoefficientsStandardErrortStat Pvalue
    Intercept
    53867
    6825
    7.893 0.000
    Odometer(km)0.270
    0.087
    3.110 0.002
    Age
    360
    1108
    0.325 0.746

    2. ComputingExercise#4
    Refer to the Computing Work document and answer question 3 on
    page23onmultipleregression.

    After estimating three import equations, the first two being simple
    linearregression,thethirdbeingamultipleregressioncontainingGNR
    and relative prices as explanatory variables you were asked the
    followingdiscussionquestion:

    Arethecoefficients1 and2 statisticallydifferentfromzeroatthe5%


    level? Of the three regression equations you estimated, which one
    providesabetterexplanationofthelevelofimports?

    The pvalues for 1 and 2 are both <0.0005 and hence at all conventional
    significancelevelsonewouldrejectthenullhypothesesthatthesecoefficients
    areindividuallyequaltozero.
    4

    We could interpret better in a number of ways. In terms of fit the third


    regressionisbestintermsofadjusted:0.9713comparedto0.9457and0.3167
    inthetwosimpleregressionmodels.(Noticethemultipleregressionmodelwill
    alwaysdominatethetwosimpleregressionmodelsintermsofR2
    butmaynotintermsofadjustedR2.)

    In addition though you could argue that the multiple regression model is
    betterbecauseitguardsagainsttheomittedvariablebiasthatislikelyinthe
    twosimplelinearregressionmodels.

    SUMMARY OUTPUT
    Regression Statistics
    Multiple R
    0.9867
    R Square
    0.9736
    0.9713
    Adjusted R
    Standard E 3140.3680
    Observatio
    26

    Intercept
    GNE
    Price

    Coefficients Standard Error


    16101.329
    10822.442
    0.249
    0.011
    -38978.894
    8255.354

    t Stat
    P-value
    1.488
    0.150
    23.406
    0.000
    -4.722
    0.000

    3. SIA:Sydneyhousingprices.
    RecallthehousingpricedataforSydneysuburbsusedinQuestion6in
    Week3.Yourstatisticallynavefriendhasbeendoingsomeanalysisof
    Sydneyhousingpricesusingthesedataandhasaskedyouforhelp.In
    addition to the price data there are a number of characteristics
    associated with the suburb that have been collected and are likely to
    explain some of the large variation in housing prices across suburbs
    that are observed in the data. Your friend was very interested in the
    impact on housing prices of being located under the flight path. The
    regression of housing price on the flightpath variable (Model 1)
    provided a result that he did not expect. On your advice he ran a
    second regression (Model 2) that included several extra explanatory
    variables.ResultsforModel1andModel2arepresentedinthetable,
    togetherwithafulldescriptionofvariablesusedintheanalysis.
    5

    Housingpriceisthemeanofthemedianpriceofhousessoldineach
    suburbfortwoquarters(SeptemberandDecember2002)measured
    inthousandsofdollars;
    DistancetoCBDisdistancemeasuredinkilometersofthesuburbfrom
    SydneysCBD;
    Distance to Airport is distance measured in kilometers of the suburb
    fromSydneyAirport;
    Distance to beach is distance of the suburb measured in kilometers
    fromthenearestbeach;
    Flightpathisadummyvariablethatequals1ifthesuburbisunderthe
    flightpathandequalto0otherwise.
    (a) How would you interpret the regression estimates for the
    parameters in Model 1 and explain why your friend found the
    resulttobeunexpected?

    Becausethe estimate of 1 is positive this means housesunder the flightpath


    on average sell for more ($216,200 more) than houses not under the
    flightpath. This is surprising because you would except aircraft noise
    associated with being under the flighpath would be unattractive and hence
    leadtolowernothigherprices.

    (b) Explain why the results in Model 1 are unreliable as a basis for
    determining the impact on housing prices of being located under
    the flight path. Which of the assumptions associated with simple
    linearregressionhasclearlybeenviolatedinModel1?

    You would like to make the statement about the impact of being under the
    flightpathholdingotherfactorsconstant.ThisisnotpossiblewithModel1
    as it is a simple linear regression and hence there is potential for omitted
    (confounding) variables that lead to biased estimates of the impact of being
    situatedundertheflightpath.

    Forexample,proximitytothebeachislikelytoimpactonhousingpricesand
    be correlated with being under the flightpath. In Model 1, the variable
    Distancetobeachisinthedisturbancetermandhenceleadstoaviolationof
    assumptionthatE(u|X)=0.

    (c)

    WriteabriefdescriptionoftheresultsforFlightpathinModel2in
    terms of the parameter estimate, its interpretation and its
    statisticalsignificance.

    The estimated parameter indicated a $51,500 premium (much smaller than


    for Model 1) for suburbs under the flightpath relative to those not holding
    otherfactorsconstant.

    Forstatisticalsignificance:
    H0: i =0versusH1: i 0where i istheithregressioncoefficient
    BecausewehavealargesamplesizewecaninvoketheCLTandusestandard
    normalcriticalvalueswhenevaluatingtheteststatisticsgivenbybi/se(bi)

    Ifwechoose =0.05thenthedecisionrulewillbetorejectif|bi/se(bi)|>1.96

    The test statistic for flightpath (51.5/50.2 = 1.03) indicates that this
    parameterisnotstatisticallydifferentfromzero.

    (d) InterprettheoverallfitofModel2.

    Model2producesanR2of0.372 37.2%ofthevariationinSydneyhousing
    prices is explained by the explanatory variables in the regression.

    (e) UseModel2topredicttheaveragehousingpriceforthesuburbof
    Randwick which is 5.21 kms from the CBD, 1.78 kms from the
    beach, 6.62 kms from the airport and is not deemed to be under
    theflightpath.

    Prediction=853.5+021.55.21+216.6213.91.78
    =855.763

    ThepredictedaveragehousepriceforRandwickis$855,763

    MultipleregressionresultsforSydneyhousingprices*

    Dependentvariable:
    Housingprice
    Model1
    Model2
    569.9
    853.5
    Intercept
    (20.6)
    (35.5)
    216.2
    51.5
    Flightpath
    (56.0)
    (50.2)
    21.5
    Distanceto

    (3.4)
    CBD
    Distanceto
    21.0

    Airport
    (2.9)
    Distanceto
    13.9

    beach
    (2.3)
    Observations
    503
    503
    Rsquared
    0.029
    0.372
    *Numbersinbracketsbelowcoefficientestimatesarestandarderrors.

    Explanatory
    variables

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