CHAPTER-4 DUMMY VARIABLE Multiple Choice Questions Choose the Best alternative for each question 1. Dummy variables classify the data into a. Inclusive categories b. Mutually exclusive categories c. Qualitative categories d. Quantitative categories 2. Ifa quantitative variable has “m’ categories, we can introduce a. Only ‘m-1’dummy variables b. Only ‘m’dummy variables ¢. Only ‘m+1’dummy variables d. Only ‘m*2’‘dummy variables 3. We are trying to nate the differentials in average annual salary of e categories in India—those employed at a fully ege (Di). Which of the following is NOT a | given Yi=B1+B2D2 +B '3D3it+u;, B1 represents the rofessors working in BS per day in Rs, p = 61 +BsDiwhere ¥ = av rs to th “ : ales and 0 otherwise. Bi erage earnings Of maleb. Average earnings of female c. Differential int d. Differential i fficien 7. ANCOVA models include regressors tl a. Only quantitative variables b. Only qualitative variables c. Only categorical variables d. Both qualitative and quantitative variables 8. ANOVA models is include a. Only quantitative variables b. Only qualitative variables c. Only categorical variables d. Both qualitative and quantitative variables ° 9. The Process of removing the seasonal component from a time series sample date is known as a. Seasonalization b. Seasonality c. Deseasonalizstion d. Seasonal trend testing 10. The regression model ¥; = a2D:+B.2(XDi)+uc is used to Deseasonalize a time series data . Analyze the seasonal trend in data Analyze structural break in data . Analyze piecewise linear relationship in data 11. The regression model given asYe = a@1Dicta2Dar +a2DatasDatasDstue where Y = NSE Index; Di =1 for Monday, O otherwise; similarly D2 to Ds=1 for Tuesday, Wednesday, Thursday and Friday respectively and 0 otherwise. Such a model may be used aoop to analyze a. Seasonality in weekly data b. Deseasonalize daily data c. Trend in NSE Index d. Structural break in weekly data Practical Questions O¥Wmo. ith One Qualita W/ ReWhere, Y = Food expenditure (in Rs.) D; = 1 for female 0 for male 6; Find the av (iy Is there a significant difference i males and females. if What is the benchmark category. Q2. Consider the following model: Ye = Bi + BoDe + Ui pe Where D; = 0 for first 20 observations and 1 for next 30 observ Var (ui) = 300 y (a) How would you interpret Bi and B2? (b) What are the mean values of 2 groups? erage food expenditure of males and femal n the average food ANOVA Models With One Qualitative Variable Having mo! Categories. ; Q3. ‘The data on average salary (in dollars) of public school 50 states and the District Of Columbia for the year 1985 wa! These 51 areas are classified into three geographical regi and North Central (21 states in all) (2) South (17 states 1 (13 states in all). The following regressions model was 0} given data: Y‘) = 26;158 623s 1734.473D2 Se = (1128.523) (1435.953) t = (23.1759) = (-1.2078) (-2.1776) (0.0000)* (0.2330)* (0.0349)* Where, * indicates the p values. (average) salary of public school teacher in state ; in the Northeast or North Central .e., in other regions of the country) Dsi = 1 if the state is in South. < fi 0 otherwise (i.e., in other regions of the country) Ind: @ ee Sao of public school teachers in the northeast and N entral. f Gi) Mean salary of public school teachers in the South Git) Mean salary of public school teachers in the West. j (iv) The benchmark category. : b (v) _ Is the mean salary of teachers statistically different from eaclANOVA Models with Two Qualitative Variables 4. From a sample of 528 persons in May 1985, the following regression results were obtained: Y; = 8.8148 + 1.0997D2i - 1.6729D3i se = (0.4015) (0.4642) (0.4854) t = (21.9528) (2.3688) (-3.4462) (0.0000)* (0.0182)* (0.0006)* where Y = hourly wage ($) Dz= married status, 1 = married, 0 = otherwise Ds = region of residence; 1 = South, 0 = otherwise And * denotes the p values. Find: (i) | The benchmark category. (ii) Interpret the regression model. (iii) Test the significance of the regression coefficients individually. Regression with a Mixture of Quantitative and Qualitative Regressors: The ANCOVA Models ‘@The following regression results were obtained for 22 individuals, andard error in parenthesis) = 1506.244 - 228.9868D, + 0.0589Xi (188.0096) (107.0582) (0.0061) R?=0,9284 Where, Y= expenditure on food ($) D; = Gender dummy variable = 1 for female = 0 for male Xi= after tax income ($) (i) Holding after tax income constant, what is the differenc mean food expenditure of males and females at then’ eer cen significance? Is the difference statistically 1 tin ae say so? AL at is the marginal propensity o| . . gender difference Constant) ed consumption holding (iii) Write and draw the regression equation fi separately. t level of significant? How can an . r males and femalesperson holding two or more jobs, one primary and 0 secondary, is known as moonlighter. Based on a sample of 3 moonlighters, the following regression is obtained, with standa parenthesis: Wm = 37.07 + 0.403W - 90.06race + 75.51urban + 47.33hisch + 14 + 2.26age ‘ (0.06) (24.47) (21.6) (23.42) (0.94) Where, Wm = moonlighting wage Ww rimary wage Age = age in years Race = 0, if white, 1 ifnon - white, Urban =0ifnonurban, 1 if urban Region =0ifnon west, 1 if west Hisch = Oifnon graduate, 1 if high school graduate Derive the wage equations for the following type of moonlighters (i) White, non urban, western resident and high school graduate. (ii) Non white, urban, non western resident and non high school graduate. (iii) White, non urban, non western resident, and high school graduat ‘ou are given the following estimated double log model for cigarette msumption in Turkey. The results are based on 29 observations, for the period 1960 — 1988. Tl variables are described as follows: InQ = Logarithm of cigarette consumption per adult (dependent variabl InY = Logarithm pf per capita GNP in 1968 prices (in Turkish Liras) — InP = Logarithm of real price of cigarettes (in Turkish Liras per kg). aa D82.= 1 for 1982.onward 0 before that D86 = 1 for 1986 onward 0 before that InQ =-4.997 + 21.793(D82) - 28.29(D86) + 0.732(inY) + 2.602(D82)(1 _ +3.928(D86)(InY) - 0.371 (InP) + 0.288(D82)(InP) 0.921 ie: hat is the numerical value of the elasticity of demand. or cigarettes with respect to income for the period 1969 - 81 period 1986 - 88? oat is the numerical value of the elasticity of d ettes with respect to price for the peri isin his study on the labor hours spent by the FDIC (Federal Deposit ance Cor] poration) on 91 pank examinations, R,J. Miller estimated the following function: n¥=2.41+ 0.3674 InX; + 0.2217 In X2 + 0.0803 In X3 - 0.1755D1 + (0.0477) (0.0628) (0.0287) (0.2905) (0.2799D2* 0.5634Ds3 - 0.2572D, (0.10444) (0.1657) (0.0787) Re= 0.776 where, Y = FDIC examiner labor hours X; = total assets of bank X, = total number of offices in bank Xz = ratio of classified loans to total loans for bank Di = 1 if management rating was “good” D2=1ifmanagement was “fair” D3 = 1 if management rating was “satisfactory” Dy = 1 if examination was conducted jointly with the state The figures in parenthesis are the estimated standard errors. (a) Interpret these results (b) Is there any problem in interpreting the dummy variables in in this model since Y is in the log 1? { (c)How would you interpret ie jummy coefficients? ps Interaction Dummies BOL + bssceer) You are told that monthly wages. W (in rupees) ened ereecor t epénds on his age A (in years). Write an appropriate model to study the monthly wages. (SGHRys ety (ii) Suppose it has been founda aer also d * Area of residence (Urban/ ni * Level of education ae Modify your model in p variables. (iii) Will your answer el residence alsoEDU = years of education D*EDU = Interactive dummy id The table below gives estimated regression coefficients ai Standard errors Estimates of Coefficients CONSTANT 0.3890 0.1190 D -0.2270 0.1680 EDU 0.0820 0.0080 D*EDU -0.0056 0.0131 i {a) Write the regression equations relating LOG (W) to EDU for n and females separately. (b) The returns to education are measured by the percentage in wages due to an extra year of education, for males and female: (q) Is the difference between returns to education for males and fer statistically significant at 5% level of significance? Q12. To study the rate of growth of population in an economy over the peri 1970 - 1992 the Following models were estimated: Model I: In(pop)= 4.73 t =(781.25) Model II: In(pop): =4.77 + raat (24 777-92) where, pop = population in t = trend variabl + 0.024t (54.71) o.01st ) (34.01) millions ie: 0.075: (-17.03) + 0.011(Dit) (25.54) D: = 1 for 1970 - 1970, 0 otherwise (for 1980 - 1992) (i) In model I, what is the rate of growth of population over th e sample period. Differentiate between instantaneous and a compound (ii) Are the population growth rates statistically different | 1980? (iii) If they are different, then what are growth rates fol 1980 - 92? rate of growth. Nek dae ose if oie