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Econ 466 Fall 2010 Homework 5 Answer Key: β / (2 - ˆ β -), or .0003/ (.000000014) ≈ 21, 428.57; re

This document contains the answer key for Homework 5 in Econ 466. It includes: 1) Estimating an equation using sales data and discussing the quadratic term and rewriting the equation using sales in billions. 2) Estimating an equation using education data and discussing the effects of siblings and parents' education. 3) Expecting the signs of coefficients in an equation predicting law school salaries and estimating the equation. 4) Discussing estimating the sum of two coefficients and its properties.

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892 views4 pages

Econ 466 Fall 2010 Homework 5 Answer Key: β / (2 - ˆ β -), or .0003/ (.000000014) ≈ 21, 428.57; re

This document contains the answer key for Homework 5 in Econ 466. It includes: 1) Estimating an equation using sales data and discussing the quadratic term and rewriting the equation using sales in billions. 2) Estimating an equation using education data and discussing the effects of siblings and parents' education. 3) Expecting the signs of coefficients in an equation predicting law school salaries and estimating the equation. 4) Discussing estimating the sum of two coefficients and its properties.

Uploaded by

Jaime Andres Chica P
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Econ 466 Fall 2010

Homework 5 Answer Key

1. Using the data in RDCHEM.RAW, the following equation was obtained by OLS:

(i) At what point does the marginal effect of sales on rdintens become negative?

The turnaround point is given by β̂1 /(2|β̂2 |), or .0003/(.000000014) ≈ 21, 428.57; re-
member, this is sales in millions of dollars.

(ii) Would you keep the quadratic term in the model? Explain.

Probably. Its t statistic is about -1.89, which is significant against the one-sided al-
ternative H0 : β1 < 0 at the 5% level (cv ≈ −1.70 with df = 29). In fact, the p-value
is about .036.

(iii) Define salesbil as sales measured in billions of dollars: salesbil = sales/1, 000.
Rewrite the estimated equation with salesbil and salesbil2 as the independent vari-
ables. Be sure to report standard errors and the R-squared. [Hint: Note that
salesbil2 = sales2 /(1, 000)2 .]

Because sales gets divided by 1,000 to obtain salesbil, the corresponding coefficient
gets multiplied by 1,000: (1,000)(.00030) = .30. The standard error gets multiplied
by the same factor. As stated in the hint, salesbil2 = sales/1, 000, 000, and so the
coefficient on the quadratic gets multiplied by one million: (1,000,000)(.0000000070)
= .0070; its standard error also gets multiplied by one million. Nothing happens to
the intercept (because rdintens has not been rescaled) or to the R2 :

1
(iv) For the purpose of reporting the results, which equation do you prefer?

The equation in part (iii) is easier to read because it contains fewer zeros to the right
of the decimal. Of course the interpretation of the two equations is identical once the
different scales are accounted for.

2. The data in WAGE2.RAW on working men was used to estimate the following equa-
tion:

d = 10.36 − 0.094sibs + 0.131meduc + 0.210f educ


educ
n = 772, R2 = 0.214

where educ is years of schooling, sibs is number of siblings, meduc is mother’s years
of schooling, and f educ is father’s years of schooling.

(i) Does sibs have the expected effect? Explain. Holding meduc and f educ fixed, by
how much does sibs have to increase to reduce predicted years of education by one
year? (A noninteger answer is acceptable here.)

Explain in your own words. We know that ∆sibs = 1, ∆educ = −0.094. This implies
that ∆educ = −1, ∆sibs = 1/0.094 = 10.64.

(ii) Discuss the interpretation of the coefficient on meduc.

Ceteris paribus, if mother has one more year of schooling, then her child, on average,
would have 0.131 more years (or about one month and a half) of schooling.

(iii) Suppose that Man A has no siblings, and his mother and father each have 12
years of education. Man B has no siblings, and his mother and father each have 16
years of education. What is the predicted difference in years of education between B
and A?

2
d = educ
∆educ d B − educ
d A = 0.131(16 − 12) + 0.21(16 − 12) = 1.364.

3. The median starting salary for new law school graduates is determined by

log(salary) = β0 + β1 LSAT + β2 GP A + β3 log(libvol) + β4 log(cost) + β5 rank + u,

where LSAT is the median LSAT score for the graduating class, GP A is the median
college GPA for the class, libvol is the number of volumes in the law school library,
cost is the annual cost of attending law school, and rank is a law school ranking
(with rank = 1 being the best).

(i) Explain why we expect β5 ≤ 0

A larger rank for a law school means that the school has less prestige; this lowers
starting salaries.

(ii) What signs do you expect for the other slope parameters? Justify your answers.

β1 , β2 > 0. Both LSAT and GP A are measures of the quality of the entering class.
Better quality should result in higher salaries. β3 , β4 > 0. The number of volumes in
the law library and tuition cost are both measures of school quality. Better quality
training (schools) should result in higher salaries.

(iii) Using the data in LAWSCH85.RAW, the estimated equation is

\
log(salary) = 8.34 + 0.0047LSAT + 0.248GP A + 0.095log(libvol)

+ 0.038log(cost) − 0.0033rank

n = 136, R2 = 0.842.

What is the predicted ceteris paribus difference in salary for schools with a median
GPA different by one point? (Report your answer as a percentage.)

This is just the coefficient on GP A, multiplied by 100: 24.8%.

3
(iv) Interpret the coefficient on the variable log(libvol).

This is an elasticity: a one percent increase in library volumes implies a 0.095% in-
crease in predicted median starting salary, other things equal.

(v) Would you say it is better to attend a higher ranked law school? How much is a
difference in ranking of 20 worth in terms of predicted starting salary?

It is definitely better to attend a law school with a lower rank. If law school A has
a ranking 20 less than law school B, the predicted difference in starting salary is
100(0.0033)(20) = 6.6% higher for law school A.

4. Consider the multiple regression model containing three independent variables, under
Assumptions MLR.1 through MLR.4:

y = β0 + β1 x1 + β2 x2 + β3 x3 + u.

You are interested in estimating the sum of the parameters on x1 and x2 ; call this
θ1 = β1 + β2 .

(i) Show that θ̂1 = β̂1 + β̂2 is an unbiased estimator of θ1 .

E(θ̂1 ) = E(β̂1 + β̂2 ) = E(β̂1 ) + E(β̂2 ) = β1 + β2 = θ1 .

(ii) Find V ar(θ̂1 ) in terms of V ar(β̂1 ), V ar(β̂2 ), and Corr(β̂1 , β̂2 ).

V ar(θ̂1 ) = V ar(
q β̂1 + β̂2 ) = V ar(β̂1 ) + V ar(β̂2 ) + 2Cov(β̂1 , β̂2 ) = V ar(β̂1 ) + V ar(β̂2 ) +
2Corr(β̂1 , β̂2 ) V ar(β̂1 )V ar(β̂2 ).

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