ECON6001A/B – Fall 2024

Problem Set #1
Due date: Sept 8th; 11:59pm

Feel free to submit your answers in groups. When doing so, put down your full names and student IDs on the
first page of your solutions. Do not copy and paste the answers from your classmates. Two identical homework
will be treated as cheating. For the empirical questions, do not copy and paste the entire output of your statistical
package. Report only the relevant parts of the output and submit both your do and log-files. Note: You should be
able to answer most questions in 2-3 sentences, so please try your best to do so. Lengthy answers will not give
you extra credit (Brevity is the soul of wit!)

Part I MCQ

Please choose the answer that you think is appropriate.

1.1 In the simple linear regression model, the regression slope
a. indicates by how many percent Y increases, given a one percent increase in X.
b. when multiplied with the explanatory variable will give you the predicted Y.
c. indicates by how many units Y increases, given a one unit increase in X.
d. represents the elasticity of Y on X.

1.2 The reason why estimators have a sampling distribution is that

a. economics is not a precise science.
b. individuals respond differently to incentives.
c. in real life you typically get to sample many times.
d. the values of the explanatory variable and the error term differ across samples.

1.3 The slope estimator, 𝜷𝜷𝟏𝟏 , has a smaller standard error, other things equal, if
a. there is more variation in the explanatory variable, X.
b. there is a large variance of the error term, u.
c. the sample size is smaller.
d. the intercept, 0, is small.

1.4 If the absolute value of your calculated t-statistic exceeds the critical value from the standard
normal distribution, you can
a. reject the null hypothesis.
b. safely assume that your regression results are significant.
c. reject the assumption that the error terms are homoskedastic.
d. conclude that most of the actual values are very close to the regression line.

Part II Short Questions

Counterfactuals

2.1. In 2020, China introduced a 30-day cooling-off period to deter careless divorces and
strengthen family stability. We would like to estimate the causal impact of this reform on the
divorce rates of Chinese couples.

2.1.1. Explain what the ideal counterfactual would be here. Why can’t this counterfactual be
observed?

2.1.2. Describe one potential counterfactual that might help us estimate the impact of this reform.
a. Describe the counterfactual clearly.

b. Explain one reason why you think this counterfactual might be helpful.
 c. Explain one potential problem with using this counterfactual.

Review of Probability Theory and Statistics

2.2. Stock & Watson 3rd edition (From hereon, SW)

SW3.16

2.3. The following graph shows a positive correlation between the strength of state gun laws (how
tough state regulation is on gun ownership) and gun- violence outcomes across states in the US as of
2012. Does the positive correlation mean that introducing stronger measures to regulate gun
ownership can reduce gun violence? Play devil's advocate and argue that correlation found in the
graph might not necessarily imply causation. Note: High rankings on the x- axis and the y-axis mean
strong gun laws and fewer gun violences, respectively. 𝑅𝑅2 is the correlation coefficient estimate.

State rankings by strength of gun laws

2.4. You have collected data for 104 countries to address the difficult questions of the
determinants for differences in the standard of living among the countries of the world. You recall
from your macroeconomics lectures that the neoclassical growth model suggests that output per
worker (per capita in- come) levels are determined by, among others, the saving rate and population
growth rate. To test the predictions of this growth model, you run the following regression:
�
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 0.339 − 12.894 ∗ 𝑛𝑛 + 1.397 ∗ 𝑠𝑠𝑠𝑠, 𝑅𝑅2 = 0.621
Where 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 is GDP per worker relative to the United States, n is the average population
growth rate, 1980-1990, and sk is the average investment share of GDP from 1960 to 1990 (remember
investment equals saving).
(a) Interpret the results. Do the signs correspond to what you expected them to be? Explain.
(Hints: The Solow growth model predicts higher productivity with higher saving rates and lower
population growth.)

(b) You remember that human capital in addition to physical capital also plays a role in
determining the standard of living of a country. You therefore collect additional data on the average
educational attainment in years for 1985, and add this variable (Educ) to the above regression. This
results in the modified regression output:
�
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 0.046 − 5.869 ∗ 𝑛𝑛 + 0.738 ∗ 𝑠𝑠𝑠𝑠 + 0.055 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸, 𝑅𝑅 2 = 0.775
When missing variable Educ, what happen to the coefficient estimates of n and sk? Explain the reason
and mechanism in detail.
(How has the inclusion of Educ affected your previous results?)

(c) Upon checking the regression output, you realize that there are only 86 observations, since
data for Educ is not available for all 104 countries in your sample. Do you have to modify some of
your statements in (b)?

(d) Brazil has the following values in your sample:

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 0.30, 𝑛𝑛 = 0.021, 𝑠𝑠𝑠𝑠 = 0.169, 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 3.5 Does your equation overpredict or
underpredict the relative GDP per worker? What would happen to this result if Brazil managed to
double the average educational attainment?

Part 3 Empirical Exercise

Stata exercise and t-test review

Using the materials from the Stata tutorial, the gender.dta dataset, and any additional
commands you need, create a do-file to give you the information necessary to answer the following
questions. You need to show your work in answering questions (1)-(2), i.e. write down the formulas
you are using, and use the numbers from the Stata output to compute the relevant confidence interval
or test statistic.

Important: For this and all future assignments, you will need to submit your Stata output (your do
and your log files) with your answers. Directions for creating “do” and “log” files is included in the
Stata tutorial.

Note: The answer you submit for this part should contain:
* Your “ps1.do” do-file
* A log file where the results (i.e. output) produced by “ps1.do” are displayed.
* Your complete write-up of answers to questions 1-3

3.1. Test the null hypothesis that the average hourly wage in the population is equal to $11.75/hour
using a 5% significance level. In doing so, indicate:

a. The null hypothesis

b. The sampling distribution and test statistic

c. The p-value of this test and your interpretation of the p-value

d. The 95% confidence interval for the hourly wage.

 3.2. What is the difference in the average hourly wage between men and women? Is this difference
statistically significant at the 5% significance level? In doing so, conduct a hypothesis test and
indicate:

a. The null hypothesis

b. The sampling distribution and test statistic

c. The p-value of this test and your interpretation of the p-value

2. Does the result of the last question provide evidence that there is gender discrimination in wages?
Explain briefly.