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Homework Session 2b (Ch2)

This document contains 4 questions from a homework assignment on regression analysis. Question 1 asks about interpreting coefficients in different model specifications. Question 2 examines estimates from a linear consumption function and asks about interpreting the intercept and slope, calculating predicted values, and graphing marginal and average propensity to consume. Question 3 analyzes a log-log housing price model and asks about interpreting coefficients and whether omitted variables bias the estimates. Question 4 estimates a GPA-ACT model from sample data and asks about the direction of the relationship, interpreting coefficients, predicted values, residuals, and the proportion of variation explained.

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Anh Thai Thi Chau
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62 views3 pages

Homework Session 2b (Ch2)

This document contains 4 questions from a homework assignment on regression analysis. Question 1 asks about interpreting coefficients in different model specifications. Question 2 examines estimates from a linear consumption function and asks about interpreting the intercept and slope, calculating predicted values, and graphing marginal and average propensity to consume. Question 3 analyzes a log-log housing price model and asks about interpreting coefficients and whether omitted variables bias the estimates. Question 4 estimates a GPA-ACT model from sample data and asks about the direction of the relationship, interpreting coefficients, predicted values, residuals, and the proportion of variation explained.

Uploaded by

Anh Thai Thi Chau
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We take content rights seriously. If you suspect this is your content, claim it here.
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Homework Session 2b (Chapter 2)

Question 1
Interpret β when the model is in the following form:
y = α + β*x + u
y = α + β*log(x) + u
log(y) = α + β*x + u
log(y) = α + β*log(x) + u

Question 2
In the linear consumption function
̂ = 𝛽̂0 + 𝛽̂1 𝑖𝑛𝑐
𝑐𝑜𝑛𝑠
the (estimated) marginal propensity to consume (MPC) out of income is simply the slope
𝛽̂1, while the average propensity to consume (APC) is 𝑐𝑜𝑛𝑠
̂ /𝑖𝑛𝑐=𝛽̂0 /𝑖𝑛𝑐 + 𝛽̂1. Using
observations for 100 families on annual income and consumption (both measured in
dollars), the following equation is obtained:

𝑐𝑜𝑛𝑠
̂ = −124.84 + 0.853 𝑖𝑛𝑐

n=100; R2=0.692

i. Interpret the intercept in this equation, and comment on its sign and magnitude.
ii. What is the predicted consumption when family income is $30,000?
iii. With inc on the x-axis, draw a graph of the estimated MPC and APC.

Question 3
Using data from 1988 for houses sold in Andover, Massachusetts, from Kiel and McClain
(1995), the following equation relates housing price (price) to the distance from a recently
built garbage incinerator (dist):

log ̂
(𝑝𝑟𝑖𝑐𝑒) = 9.40 + 0.312 log (𝑑𝑖𝑠𝑡)

n=135; R2=0.162

i. Interpret the coefficient on log(dist). Is the sign of this estimate what you expect it to
be?
ii. Do you think simple regression provides an unbiased estimator of the ceteris paribus
elasticity of price with respect to dist? (Think about the city’s decision on where to
put the incinerator.)
iii. What other factors about a house affect its price? Might these be correlated with
distance from the incinerator?
Question 4

The following table contains the ACT scores and the GPA (grade point average) for eight
college students. Grade point average is based on a four-point scale and has been rounded to
one digit after the decimal.

(i) Estimate the relationship between GPA and ACT using OLS.
̂ = 𝛽̂0 + 𝛽̂1 𝐴𝐶𝑇
𝐺𝑃𝐴
Comment on the direction of the relationship. Does the intercept have a useful interpretation
here? Explain. How much higher is the GPA predicted to be if the ACT score is increased by
five points?
(ii) Compute the fitted values and residuals for each observation, and verify that the residuals
(approximately) sum to zero.
(iii) What is the predicted value of GPA when ACT = 20?
(iv) How much of the variation in GPA for these eight students is explained by ACT?
Explain.

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