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TestExer5 Econometrics

This document contains an economics exam question regarding analysis of responses to a direct mailing using a logit specification. It asks the student to: 1) Compute the elasticity effect of active status for a 50-year-old active and inactive male customer using the marginal effect formula. 2) Explain that the activity status variable is binary, so it is better to define the elasticity as the difference in response probabilities over the baseline probability. 3) Simplify the elasticity expression and use it to compute the activity elasticity for a 50-year-old active male customer.

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252 views3 pages

TestExer5 Econometrics

This document contains an economics exam question regarding analysis of responses to a direct mailing using a logit specification. It asks the student to: 1) Compute the elasticity effect of active status for a 50-year-old active and inactive male customer using the marginal effect formula. 2) Explain that the activity status variable is binary, so it is better to define the elasticity as the difference in response probabilities over the baseline probability. 3) Simplify the elasticity expression and use it to compute the activity elasticity for a 50-year-old active male customer.

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Uratile Patricia
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MOOC Econometrics

Test Exercise 5

Questions

Consider again the application in lecture 5.5, where we have analyzed response to a direct mailing using the
following logit specification

exp(β0 + β1malei + β2activei + β3agei + β4(agei/10)2)


Pr[respi = 1] = 2

1 + exp(β0 + β1malei + β2activei + β3agei + β4(agei/10) )


for i = 1,...,925. The maximum likelihood estimates of the parameters are given by
Variable Coefficient Std. Error t-value p-value
Intercept -2.488 0.890 -2.796 0.005
Male 0.954 0.158 6.029 0.000
Active 0.914 0.185 4.945 0.000
Age 0.070 0.036 1.964 0.050
(Age/10)2 -0.069 0.034 -2.015 0.044
(a) The marginal effect of activity status is defined as

∂ Pr[respi = 1]
= Pr[respi = 1]Pr[respi = 0]β2.
∂activei
We could use this result to construct an activity status elasticity

∂ Pr[respi = 1] activei
= Pr[respi = 0]activeiβ2. ∂activei
Pr[respi = 1]

Use this results to compute the elasticity effect of active status for a 50 years old active male customer. Do the
same for an 50 years old inactive male customer.

Solution

Pr [ respi=0; malei=1; activei=1; agei=50]

= 1
1+ exp ( -2.49 +0.95 +0.91+(0.07*50)-(0.07*25))
≈ 0.25
From the activity status elasticity, we have:

= 0.25* β2activei

= 0.25*0.914

≈ 0.22 for active 50-year-old male.

Pr [ respi=0; malei=1; inactivei=0; agei=50]

= 1
1+ exp ( -2.49 +0.95 +0.92(0)+(0.07*50)-(0.07*25))

= 1
1+ exp ( -2.49 +0.95+(0.07*50)-(0.07*25))

≈ 0.45

From the activity status elasticity, we have:

= 0.45* β2activei

=0.45 *0.914(0)

= 0 for inactive 50-year-old male

(b) The activity status variable is only a dummy variable and hence it can take only two values. It is therefore better
to define the elasticity as

Pr[respi = 1|activei = 1] − Pr[respi = 1|activei = 0]


.
Pr[respi = 1|activei = 0]
Show that you can simplify the expression for the elasticity as

(exp(β2) − 1)Pr[respi = 0|activei = 1].


Solution

exp (activei β2) exp (β0 + β1malei + β2activei + β3agei + β4(agei/10)) =2i*exp(β2active)

Pr [respi = 1|activei = 1] − Pr [respi = 1|activei = 0]


= .
Pr [respi = 1|activei = 0]
exp(β2)2i - 2i
= 1+ exp(β1)2i 1+2i 1+2i
2i 2i
1+2i

= exp (β2 )(1+2i)


1+exp(β2)2i

= exp(β2)(1-2i) – (1 + exp(β1)2i)
1+ exp(β1)2i

= exp(β2) -1
1+ exp(β1)2i

= (exp(β2) − 1)Pr[respi = 0|activei = 1].

(c) Use the formula in (b) to compute the activity elasticity of 50 years old male active customer.

Solution

(exp(β2) − 1)Pr[respi = 0|activei = 1].

= ( exp(β2) – 1) Pr[ respi =0 I activei =1, malei =1 , agei =50]

= (exp (0.914)-1) * 1
1+ exp ( -2.49 +0.95+(0.07*50)+0.91-(0.069*25))
= 0.35

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