UNIVERSITY OF THE WESTERN CAPE

BASIC ECONOMETRICS (ECO242)

Module Test 2 10 May 2024

Time: 2 hours Marks: 60

ANSWER ALL QUESTIONS.
ROUND OFF YOUR ANSWERS TO 4 DECIMAL PLACES, IF NECESSARY.
MCQs MUST BE COMPLETED ON THE PINK SHEETS PROVIDED.
READ THE INSTRUCTIONS ON THE PINK SHEETS CAREFULLY.

QUESTION 1 [10x2]

1.1 The difference between the 'error term' and the 'residual' is that...
a. the former relates to the PRF and the latter relates to the SRF.
b. the former relates to the SRF and the latter relates to the PRF.
c. there is no difference, just different terminology for the same concept.
d. the former is an estimate of the latter.
e. the former is based on sample data and the latter is based on population data.

1.2 The sample regression function is....

a. a better representation of the data than is the population regression function.
b. an estimator of the population regression function.
c. estimated using population data.
d. an estimator giving the true mean response of Y for given values of X.
e. is usually estimated without an error term.

1.3 The CNLRM assumes that...

a. each error term is normally distributed.
b. the sample mean of the error term is zero.
c. the mean of the error terms is normally distributed.
d. the regressors are normally distributed.
e. the outcome variable is normally distributed.

1.4 Choose the incorrect statement below.

a. The coefficient of determination, 𝑟𝑟 2 , provides a summary measure of how well the SRF
fits the data.
b. Given two regression models, the one with the higher, 𝑟𝑟 2 value is always a more
accurate model than the one with the lower, 𝑟𝑟 2 value.
c. The residual sum of squares is given by ∑(𝑌𝑌 − 𝑌𝑌 �
�𝚤𝚤 )2 .
2
d. 𝑟𝑟 is given by the ratio of the explained sum of squares and the total sum of squares.
e. 𝑟𝑟 2 is a summary measure of how well the SRF approximates the PRF.

.
1.5 The ............. are used to construct a confidence interval around OLS parameters.
a. the error terms
b. the variance of the regression
c. standard errors of 𝛽𝛽̂ 1 and 𝛽𝛽̂ 2
d. Z transformation
e. standard normal distributions

1.6 Estimating the confidence interval for the variance of regression requires the statistic: 𝑥𝑥 2 =
�2
𝜎𝜎
(n – 2)𝜎𝜎2 which follows...
a. The F distribution.
b. the normal distribution.
c. the standard-normal distribution.
d. The z-distribution.
e. None of the above.

1.7 Degrees of freedom (𝑑𝑑.𝑓𝑓.) = 𝑛𝑛−𝑘𝑘, where 𝑘𝑘 represents…

a. the number of explanatory variables excluding the intercept term.
b. the number of dependent variables excluding the intercept term.
c. the number of explanatory variables including the intercept term.
d. the number of explanatory variables excluding the slope term.
e. the number of explanatory variables including the slope term.

1.8 In hypothesis testing, the 'critical value' refers to...

a. the threshold value defining the rejection region for a particular test.
b. the threshold value beyond which (in absolute terms) the null hypothesis is accepted.
c. the threshold value found in the chi-squared statistical table for a given significance
level.
d. the value determining the probability of accepting the null hypothesis.
e. All of the above.

1.9 In hypothesis testing, H1 represents the…

a. null hypothesis
b. secondary hypothesis
c. alternative hypothesis
d. primary hypothesis
e. hypothesis

1.10 Choose the correct statement:

a. the probability of making a type I error is 1- 𝛼𝛼
b. the probability of making a type II error is 𝛼𝛼
c. the probability of making a type I and II error determined by the significance level
d. the probability of making a type I error is 𝛼𝛼 2
e. none of the above
QUESTION 2 [30]

2.1 Mariana, a researcher at the World Health Organisation (WHO), collects information
on weekly study hours (HOURS) and blood pressure level when writing a test
(BLOOD) from a sample of university students across the country, before running the
regression BLOOD = f(STUDY). She collects data from 5 students as listed below:

X (STUDY) Y (BLOOD)
02 141
04 138
06 133
08 127
10 123

2.1.1 By using the OLS method and the information above derive the values for parameters
𝛽𝛽1 and 𝛽𝛽2. (6)
2.1.2 Derive the RSS (sum of squares for the residuals). (3)
2.1.3 Hence, calculate 𝜎𝜎� (2)

2.2 Further, she replicates her study and collects data from 122 students from a rival
university. She derives the residuals followed by computing skewness (S) equals -1.25
and kurtosis (K) equals 8.25 for the rival university data. Conduct the Jacque-Bera test
of normality at α = 0.05. (5)

2.3 Upon tasked with deriving estimates of 𝛽𝛽1, 𝛽𝛽2 , 𝜎𝜎�2 and the standard errors (SE) of 𝛽𝛽1
and 𝛽𝛽2 for the replicated data. Mariana assistant calculates them to be:
Estimated value
0𝛽𝛽1 140.4444
0𝛽𝛽2 -2.7822
0SE(𝛽𝛽1) 1.2345
0SE(𝛽𝛽2 ) 0.1555
𝜎𝜎� 2.5232
0Sample size (n) 122
Using above information conduct the following:
2.3.1 the 99% confidence interval for 𝛽𝛽2; provide an interpretation of your answer too (4)
2
2.3.2 the 95% confidence interval for 𝜎𝜎� (2)
2.3.3 the hypothesis test at 𝛼𝛼 = 5% where H0: β1 = 135 and H1: β1 > 135 (4)
2.3.4 the hypothesis test at 𝛼𝛼 = 1% where H0: β1 = -2.5 and H1: β1 < -2.5 (4)
Appendix
^ ^ ^ ^
− Confidence interval ( β i ) : 𝑃𝑃𝑃𝑃[ 𝛽𝛽𝑖𝑖 − 𝑠𝑠𝑠𝑠(𝛽𝛽𝑖𝑖 ) ⋅ 𝑡𝑡 ≤ 𝛽𝛽𝑖𝑖 ≤ 𝛽𝛽𝑖𝑖 + 𝑠𝑠𝑠𝑠(𝛽𝛽𝑖𝑖 ) ⋅ 𝑡𝑡] = 1 − 𝛼𝛼
^ ^
2 𝜎𝜎2 2 𝜎𝜎2
− Confidence interval (𝜎𝜎 ):𝑃𝑃𝑃𝑃 �(𝑛𝑛 − 𝑘𝑘) 𝜒𝜒2 ≤ 𝜎𝜎 ≤ (𝑛𝑛 − 𝑘𝑘) 𝜒𝜒2 � = 1 − 𝛼𝛼
𝑛𝑛−𝑘𝑘;𝛼𝛼/2 𝑛𝑛−𝑘𝑘;1−𝛼𝛼/2
^ ∑ 𝑋𝑋𝑖𝑖 𝑌𝑌𝑖𝑖 −𝑛𝑛𝑋𝑋𝑌𝑌 ^ ^
− Bivariate regression parameters: 𝛽𝛽2 = 𝛽𝛽1 = 𝑌𝑌 − 𝛽𝛽2 𝑋𝑋
∑ 𝑋𝑋𝑖𝑖2 −𝑛𝑛𝑋𝑋 2

𝑆𝑆 2 (𝐾𝐾−3)2
− Jacque-Bera (JB) test of normality: 𝐽𝐽𝐽𝐽 = 𝑛𝑛 � + �
6 24
�2 −𝛽𝛽2∗
𝛽𝛽
− Computed t-statistic: �2 )
𝑠𝑠𝑠𝑠(𝛽𝛽
^
− ESS =∑𝑛𝑛𝑖𝑖=1(𝑌𝑌𝑖𝑖 − 𝑌𝑌)2
n ^ n ^
− RSS = ∑ (Yi − Yi ) 2 = ∑ µ 2
i =1 i =1

− TSS = ∑𝑛𝑛𝑖𝑖=1(𝑌𝑌𝑖𝑖 − 𝑌𝑌) 2

Percentage points of the t-distribution

Degrees Alpha
of 0.25 0.10 0.05 0.025 0.01 0.005 0.001
freedom 0.50 0.20 0.10 0.050 0.02 0.010 0.002
001 1.000 3.078 6.314 12.706 31.821 63.657 318.310
002 0.816 1.886 2.920 04.303 06.965 09.925 022.327
003 0.765 1.638 2.353 03.182 04.541 05.841 001.214
004 0.741 1.533 2.132 02.776 03.747 04.604 007.173
005 0.727 1.476 2.015 02.571 03.365 04.032 005.893
006 0.718 1.440 1.943 02.447 03.143 03.707 005.208
007 0.711 1.415 1.895 02.365 02.998 03.499 004.785
008 0.706 1.397 1.860 02.306 02.896 03.355 004.501
009 0.703 1.383 1.833 02.262 02.821 03.250 004.297
010 0.700 1.372 1.812 02.228 02.764 03.169 004.144
011 0.697 1.363 1.796 02.201 02.718 03.106 004.025
012 0.695 1.356 1.782 02.179 02.681 03.055 003.930
013 0.694 1.350 1.771 02.160 02.650 03.012 003.852
014 0.692 1.345 1.761 02.145 02.624 02.977 003.787
015 0.691 1.341 1.753 02.131 02.602 02.947 003.733
016 0.690 1.337 1.746 02.120 02.583 02.921 003.686
017 0.689 1.333 1.740 02.110 02.567 02.898 003.646
018 0.688 1.330 1.734 02.101 02.552 02.878 003.610
019 0.688 1.328 1.729 02.093 02.539 02.861 003.579
020 0.687 1.325 1.725 02.086 02.528 02.845 003.552
021 0.686 1.323 1.721 02.080 02.518 02.831 003.527
022 0.686 1.321 1.717 02.074 02.508 02.819 003.505
023 0.685 1.319 1.714 02.069 02.500 02.807 003.485
024 0.685 1.318 1.711 02.064 02.492 02.797 003.467
025 0.684 1.316 1.708 02.060 02.485 02.787 003.450
026 0.684 1.315 1.706 02.056 02.479 02.779 003.435
027 0.684 1.314 1.703 02.052 02.473 02.771 003.421
028 0.683 1.313 1.701 02.048 02.467 02.763 003.408
029 0.683 1.311 1.699 02.045 02.462 02.756 003.396
030 0.683 1.310 1.697 02.042 02.457 02.750 003.385
040 0.681 1.303 1.684 02.021 02.423 02.704 003.307
060 0.679 1.296 1.671 02.000 02.390 02.660 003.232
120 0.677 1.289 1.658 01.980 02.358 02.617 003.160
∞ 0.674 1.282 1.645 01.960 02.326 02.576 003.090
 Upper percentage points of the Chi-squared distribution

Probability
0.995 0.990 0.975 0.950 0.900 0.100 0.050 0.025 0.010 0.005
1 0.000 0.000 0.001 0.004 0.016 2.706 3.841 5.024 6.635 7.879
2 0.010 0.020 0.051 0.103 0.211 4.605 5.991 7.378 9.210 10.597
3 0.072 0.115 0.216 0.352 0.584 6.251 7.815 9.348 11.345 12.838
4 0.207 0.297 0.484 0.711 1.064 7.779 9.488 11.143 13.277 14.860
5 0.412 0.554 0.831 1.145 1.610 9.236 11.070 12.833 15.086 16.750
6 0.676 0.872 1.237 1.635 2.204 10.645 12.592 14.449 16.812 18.548
7 0.989 1.239 1.690 2.167 2.833 12.017 14.067 16.013 18.475 20.278
8 1.344 1.646 2.180 2.733 3.490 13.362 15.507 17.535 20.090 21.955
9 1.735 2.088 2.700 3.325 4.168 14.684 16.919 19.023 21.666 23.589
10 2.156 2.558 3.247 3.940 4.865 15.987 18.307 20.483 23.209 25.188
11 2.603 3.053 3.816 4.575 5.578 17.275 19.675 21.920 24.725 26.757
12 3.074 3.571 4.404 5.226 6.304 18.549 21.026 23.337 26.217 28.300
13 3.565 4.107 5.009 5.892 7.042 19.812 22.362 24.736 27.688 29.819
14 4.075 4.660 5.629 6.571 7.790 21.064 23.685 26.119 29.141 31.319
15 4.601 5.229 6.262 7.261 8.547 22.307 24.996 27.488 30.578 32.801
16 5.142 5.812 6.908 7.962 9.312 23.542 26.296 28.845 32.000 34.267
17 5.697 6.408 7.564 8.672 10.085 24.769 27.587 30.191 33.409 35.718
18 6.265 7.015 8.231 9.390 10.865 25.989 28.869 31.526 34.805 37.156
19 6.844 7.633 8.907 10.117 11.651 27.204 30.144 32.852 36.191 38.582
20 7.434 8.260 9.591 10.851 12.443 28.412 31.410 34.170 37.566 39.997
21 8.034 8.897 10.283 11.591 13.240 29.615 32.671 35.479 38.932 41.401
22 8.643 9.542 10.982 12.338 14.041 30.813 33.924 36.781 40.289 42.796
23 9.260 10.196 11.689 13.091 14.848 32.007 35.172 38.076 41.638 44.181
24 9.886 10.856 12.401 13.848 15.659 33.196 36.415 39.364 42.980 45.559
25 10.520 11.524 13.120 14.611 16.473 34.382 37.652 40.646 44.314 46.928
26 11.160 12.198 13.844 15.379 17.292 35.563 38.885 41.923 45.642 48.290
27 11.808 12.879 14.573 16.151 18.114 36.741 40.113 43.195 46.963 49.645
28 12.461 13.565 15.308 16.928 18.939 37.916 41.337 44.461 48.278 50.993
29 13.121 14.256 16.047 17.708 19.768 39.087 42.557 45.722 49.588 52.336
30 13.787 14.953 16.791 18.493 20.599 40.256 43.773 46.979 50.892 53.672
Degrees of freedom

40 20.707 22.164 24.433 26.509 29.051 51.805 55.758 59.342 63.691 66.766
50 27.991 29.707 32.357 34.764 37.689 63.167 67.505 71.420 76.154 79.490
60 35.534 37.485 40.482 43.188 46.459 74.397 79.082 83.298 88.379 91.952
70 43.275 45.442 48.758 51.739 55.329 85.527 90.531 95.023 100.425 104.215
80 51.172 53.540 57.153 60.391 64.278 96.578 101.879 106.629 112.329 116.321
90 59.196 61.754 65.647 69.126 73.291 107.565 113.145 118.136 124.116 128.299
100 67.328 70.065 74.222 77.929 82.358 118.498 124.342 129.561 135.807 140.169