ECON3334 L2 Introduction to Econometrics

Midterm Exam, Fall 2022

Name (as shown on Student ID Card) and please put your SURNAME/FAMILY NAME first:

_______________________________________

Student ID (as shown on Student ID Card):

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There are three parts, 12 questions in total. Let us know immediately if there are questions missing
in your exam paper. The total points is 60.

Part I. (16pt) Multiple choice problems. Circle or write down the letter of the best answer.

1. A type II error:
A) is typically smaller than the type I error.
B) is the error you make when choosing type II or type I.
C) is the error you make when not rejecting the null hypothesis when it is false.
D) cannot be calculated when the alternative hypothesis contains an "=".

2. The standard error of 𝑌̅ is given by the following formula:

A) 𝑠𝑌
2
𝑠𝑌
B) 𝑛
𝑠𝑌
C)
√𝑛
𝑠𝑌
D) 𝑛
1
where 𝑠𝑌 = 𝑛−1 ∑𝑛𝑖=1(𝑌𝑖 − 𝑌̅)2 .

3. To derive the OLS estimator of a linear regression model, you find the values of 𝑏0 and 𝑏1 which
minimizes:
A) ∑𝑛𝑖=1(𝑌𝑖 − 𝑏0 − 𝑏1 𝑋𝑖 )2
B) ∑𝑛𝑖=1 |𝑌𝑖 − 𝑏0 − 𝑏1 𝑋𝑖 |
C) ∑𝑛𝑖=1(𝑌𝑖 − 𝑏0 − 𝑏1 𝑋𝑖 )
D) ∑𝑛𝑖=1 𝑌𝑖 (𝑌𝑖 − 𝑏0 − 𝑏1 𝑋𝑖 )

4. 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.

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5. To obtain the slope estimator using the least squares principle, you divide the:
A) sample variance of X by the sample variance of Y.
B) sample covariance of X and Y by the sample variance of Y.
C) sample covariance of X and Y by the sample variance of X.
D) sample variance of X by the sample covariance of X and Y.

6. The OLS estimator for the slope for the simple linear regression model is:
𝑠
A) 𝑠𝑋𝑌
2
𝑋
𝑠𝑋𝑌
B)
𝑠𝑋
2
𝑠𝑋𝑌
C) 𝑠2
𝑋
𝑠2
D) 𝑠𝑋𝑌
𝑋
1 1
where 𝑠𝑋𝑌 = 𝑛−1 ∑𝑛𝑖=1(𝑋𝑖 − 𝑋̅)(𝑌𝑖 − 𝑌̅) and 𝑠𝑋2 = 𝑛−1 ∑𝑛𝑖=1(𝑋𝑖 − 𝑋̅)2 .

7. In general, the t-statistic has the following form:

A) (estimator – hypothesized value) / (standard error of the estimator)
B) (estimator) / (standard error of the estimator)
C) (estimator – hypothesized value) / [√𝑛(standard error of the estimator)]
D) √𝑛 (estimator – hypothesized value) / (standard error of the estimator)

8. The 95% confidence interval for 𝛽1 is the interval:

A) [𝛽1 − 1.96 ⋅ 𝑆𝐸(𝛽1 ), 𝛽1 + 1.96 ⋅ 𝑆𝐸(𝛽1 )]
B) [𝛽̂1 − 1.65 ⋅ 𝑆𝐸(𝛽̂1 ), 𝛽̂1 + 1.65 ⋅ 𝑆𝐸(𝛽̂1 )]
C) [𝛽̂1 − 1.96 ⋅ 𝑆𝐸(𝛽̂1 ), 𝛽̂1 + 1.96 ⋅ 𝑆𝐸(𝛽̂1 )]
D) [𝛽̂1 − 1.96, 𝛽̂1 + 1.96]

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Part II. (12pt) Discuss the following research plans.

9. Yana wants to study whether the public job training program in a city for the unemployed could increase
the chance of getting employed. An unemployed person can register for the program by visiting the
government’s website. For this, she collected the list of people who applied for unemployment insurance
in a month in the city and matched it with the job training participation record. The government gave
information on only 10% of randomly selected people who applied for the unemployment insurance. The
resulting data set contains 6,341 all unemployed who applied for the unemployed insurance in the month
in the city and includes the social security ID of the subject, the date of training, which is NA if not
participating the training, and whether the subject is employed 3 months after the date of the unemployment
insurance application.

a) (1pt) Yana is going to use a simple linear regression model to estimate the effect of job training on
the change of getting employed. What should be the dependent and explanatory variables?

b) (1pt) Suppose that the population you consider is the unemployed who applied for unemployment
insurance in the city in the month. Is this a random sampling? Answer yes or no and give a reason.

c) (2pt) Suppose that the population you consider is unemployed in the city in the month. Is this a
random sampling? Answer yes or no and give a reason.

d) (2pt) Yana found that the OLS estimate of the slope was positive and significant at a 1% level. Can
she say that the unemployed should participate in the job training program if they want to increase
the chance of getting employed? Answer yes or no and give a reason.

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10. Kelly wants to know whether she can increase clean fuel adoption in rural areas, by raising awareness
of the adverse health effect of cooking with solid fuels. To study this, Kelly randomly picked up 100 villages
and randomly divided them into two groups. For a group of villages, Kelly did nothing. For another group
of villages, Kelly asked the local health authority to visit the village and provide a seminar on the topic.
Kelly conducted pre- and post-survey and measured the use of LPG refills (clean fuel) used in each
household just before and after the intervention period. Kelly aggregated the use of LPG at the village level,
i.e. calculated the total number of LPG refills used in the village.

a) (1pt) Kelly is going to use a simple linear regression model to estimate the effect of raising
awareness on clean fuel adoption. What should be the dependent and explanatory variables?

Kelly found that the OLS estimate of the slope was positive and significant at a 1% level. Kelly insists that
this could be interpreted as the average treatment effect of raising awareness. Let 𝑓𝑖 (0) be the number of
clean fuels used in village 𝑖 when there is no awareness campaign and 𝑓𝑖 (1) be the number of clean fuels
used in the village when there is an awareness campaign.

b) (1pt) How is the average treatment effect defined?

Suppose that half of the village is of type 𝑓𝑖 (𝑥) = 100 + 𝑥 and half of the village is of type 𝑓𝑖 (𝑥) = 98 + 𝑥.

c) (1pt) What is the value of the average treatment effect?

d) (3pt) Discuss why the OLS estimator of the slope could be interpreted as the estimate of the average
treatment effect using the model.

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Part III. (32pt) Calculation and Analytics

11. (14pt) We have data on 546 properties in Canada in 1987. The relation between the property (1000
CAD) and the lot size (1000 sqft) look like this:

By estimating a simple linear regression model, we obtained the following estimation results.

𝛽̂0 𝛽̂1
Estimates 6.60
Standard Error 2.65
t-statistics with the null 14.80
hypothesis equal to 0
95% Confidence Interval [29.24, 39.03]

a) (8pt) Fill in the blanks based on the given information and provide derivation. Use Φ(−1.96) = 0.025
and Φ(−2.58) = 0.005. Write up to the second digit by rounding up the third digit.

b) (3pt) Can you reject 𝐻0 : 𝛽0 = 30 at 5% level? Why?

c) (3pt) Can you reject 𝐻0 : 𝛽1 = 5 at 5% level? Why?

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12. (18pt) Let 𝛽̂1 be the OLS estimator of 𝛽1 in the linear regression model 𝑌𝑖 = 𝛽0 + 𝛽1 𝑋𝑖 + 𝑢𝑖 . Suppose
all the three OLS assumptions hold (unconfoundedness, i.i.d., and no large outliers). Consider the
2 𝑛+2
following three estimators: 𝛽̂1 + , 2√𝑛𝛽̂1, and 𝛽̂1 . 𝑛 is the sample size. Suppose 𝛽1 = 1.
𝑛 𝑛

a) (6pt) Calculate the bias for each estimator. (𝑛 may show up in your answer and you can leave it there.)

𝑛+2
b) (3pt) Is the third estimator, i.e., 𝛽̂1 , consistent? Why or why not?
𝑛

c) (6pt) Suppose the variance of 𝛽̂1 is 1. Calculate the variances of these three estimators. (𝑛 may show up
in your answer and you can leave it there.)

d) (3pt) Based on a), b), and c), if you are asked to recommend one estimator from these three, which one
would you recommend?

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[Rough Work Only]