Debark University

Department Of Economics
Individual and Group Assignment For Econometrics II
Weight: 20% Submission Date: Tir 25, 2017 E.C
Attempt All The Questions Of Your Share
It Is Subject To Presentation as Part Of Your Individual Assignment; everybody ready
for that!
Do your work clearly, neatly and exactly as much as you can. Put your effort on all the
questions. You will be better off in doing so. Not for points but for knowledge sake.
You may communicate for any inconvenience

Group 1: 1A, 4J, F, 5B; 7C, 8A, 10, 15, 21, 4I

Group 2:2, 4 B, D, H; 5A, E; 9, 12, 13.
Group 3: 3, 4A, C; 5C, D; 7B, 8E, 19, 16, 18
Group 4: 4G, E, G; 5F; 6, 7D, 8B, 20, 11, 14

1. State the conditions necessary for the process to be:

A. Strongly stationary
B. Weakly stationary
2. (i) What does it mean for a time series to be causal? Define precisely what it mean for a
time series Yt to be an AR (1) series, autoregressive of order one.
3. Define the autocorrelation function (ACF) for a stationary time series in detail mathematically.
4. Based on the following demand function for coffee, answer the questions that follow. (The
figures in parentheses are t values.)
lnQt = 1.2789 - 0.1647 ln Pt + 0.5115 ln It + 0.1483 ln Pt¿
t= (-2.14) (1.23) (0.55)
-0.0089T - 0.0961 D1t - 0.1570D2t - 0.0097D3t R2 = 0.80
t = (-3.36) (-3.74) (-6.03) (-0.37)
where Q = pounds of coffee consumed per capita
P = the relative price of coffee per pound at 1967 prices
I = per capita PDI, in thousands of 1967 dollars
P’ = the relative price of tea per quarter pound at 1967 prices
t = the time trend with t = 1 for 1961-I, to t = 66 for 1977-II
D1 = 1 for the first quarter D2 = 1 for the
second quarter D3 = 1 for the third quarter
ln = the natural log
A. How would you interpret the coefficients of P, I, and P’?
B. Is the demand for coffee price elastic?
C. Are coffee and tea substitute or complementary products?
D. How would you interpret the coefficient of t?
E. What is the income elasticity of demand for coffee?
 F. How would you test the hypothesis that the income elasticity of demand
for coffee is not significantly different from 1?
G. How do you interpret the dummies in this model?
H. Which of the dummies are statistically significant?
I. Is there a pronounced seasonal pattern in coffee consumption in the
United States? If so, what accounts for it?
J. Which is the benchmark quarter in this example? Would the results
change if we chose another quarter as the base quarter
5. In a regression of weight on height involving 51 students, 36 males and 15 females, the following
regression results were obtained:
I. Weighti = -232.06551 + 5.5662heighti
t = (-5.2066) (8.6246)
II. Weighti = -122.9621 + 23.8238dumsexi + 3.7402heighti
t = (-2.5884) (4.0149) (5.1613)
III. Weighti = -107.9508 + 3.5105heighti + 2.0073dumsexi + 0.3263dumht.
t = (-1.2266) (2.6087) (0.0187) (0.2035)
where weight is in pounds, height is in inches, and where
Dumsex = 1 if male
= 0 if otherwise
Dumht. = the interactive or differential slope dummy
A. Which regression would you choose, 1 or 2? Why?
B. If2 is in fact preferable but you choose 1, what kind of error are you com- mitting?
C. What does the dumsex coefficient in 2 suggest?
D. In Model 2 the differential intercept dummy is statistically significant whereas in
Model 3 it is statistically insignificant. What accounts for this change?
E. Between Models 2 and 3, which would you choose? Why?
F. In Models 2 and 3 the coefficient of the height variable is about the same, but the
coefficient of the dummy variable for sex changes dramatically. Do you have any
idea what is going on?
6. Consider the following model:
 Yi = B1 + B2D2i + B3D3i + B4 (D2i D3i) + B5Xi + ui
where Y = the annual salary of a college teacher
X = years of teaching experience
D2 = 1 if male
= 0 if otherwise
D3 = 1 if white
= 0 if otherwise
A. What does term (D2iD3i) expression mean?
B. What is the meaning of B4?
7. Given the impact of product differentiation on rate of return on equity. To find out whether firms
selling differentiated products (i.e., brand names) experience higher rates of return on their equity
capital the following regression results are obtained based on a sample of 48 firms:
YN i = 1.399 + 1.490Di + 0.246X2i - 9.507X3i - 0.016X4i
se = (1.380) (0.056) (4.244) (0.017) R2 = 0.26
t= (1.079) (4.285) (-2.240) (-0.941)
p value = (0.1433) (0.000) (0.0151) (0.1759)
where Y = the rate of return on equity
D = 1 for firms with high or moderate product differentiation
X2 = the market share
X3 = the measure of firm size
X4 = the industry growth rate
A. Do firms that product-differentiate earn a higher rate of return? How do you know?
B. Is there a statistical difference in the rate of return on equity capital be- tween firms that do
and do not product-differentiate? Show the necessary calculations.
C. Write the equation that allows for both the differential intercept and differential slope dummies.
D. Test for the significance of each parameter using p-value?
8. From sample of 1289 workers the following information on is given:
Wage = hourly wage in $ Age = age in years
Female = 1 if female worker Nonwhite = 1 if a
nonwhite worker
Union = 1 if a union member
Education = years of schooling
Experience = potential labor market experience in years.
ln Wagei = B1 + B2 Age + B3 Female + B4 Nonwhite + B5 Union + B6 Education
+ B7 Experience + ui
A. How do you interpret each regression coefficient?
B. Which of these coefficients are statistically significant at the 5% level? Also
obtain the p value of each estimated t value.
C. Do union workers, on average, earn a higher hourly wage?
D. Do female workers, on average, earn less than their male counterparts?
E. Is the average hourly wage of female nonwhite workers lower than the average
hourly wage of female white workers? How do you know?
9. Explain the concepts of stationarity and non-stationarity in the context of time series data.
Provide examples of economic variables that are likely to be stationary and non-stationary.
Discuss why it is crucial to test for stationarity before running time series regressions. How
 might failing to account for non-stationarity affect the reliability of regression results?
10. Describe the process of conducting a unit root test, focusing on the Augmented Dickey-Fuller
(ADF) test. Detail the null and alternative hypotheses, and discuss the interpretations of the
test's results and the implications for the underlying time series data. What are the limitations of
the ADF test, and what other tests could be used?
11. Differentiate between Differential intercept dummies and Differential slope dummies.
12. Error Correction Models (ECM): Explain the concept of an error correction model (ECM).
Discuss how ECM combines short-run dynamics with long-run equilibrium to provide insights
into dynamic adjustments in the relationship between cointegrated variables. Using
mathematical forms, show how an ECM can be formulated and what interpretations can be
derived from ECM coefficients.
13. Define Granger causality and explain what it implies in the context of two time series variables.
Using mathematical notation, formulate the test equations. Discuss what it means to say "X
Granger causes Y" or "X does not Granger cause Y." How is Granger causality different from
true causality? What are the common limitations?
14. Explain the difference between panel data and cross-sectional data, and discuss why panel data
is often superior to cross-sectional data for econometric analysis. What are the specific
advantages and potential limitations of panel data analysis?
15. Discuss the use of pooled OLS (POLS) in panel data analysis. When is the use of the pooled
OLS appropriate and when might this approach be invalid? What are the key limitations of the
POLS model? How can panel data help you in avoiding the problems with POLS?
16. Differentiate between Pooled OLS, FE and RE models
17. What is "simultaneous equation bias" and why is it a major concern in economic modeling?
How does OLS perform in the face of simultaneous equation bias?
18. Discuss the identification problem in simultaneous equations models. What conditions are
required for a structural equation to be identified? What if an equation is not identified?
19. Two-Stage Least Squares (2SLS): Describe the two-stage least squares (2SLS) method for
estimating parameters in a simultaneous equation model. In what way does the method address
the problem of endogeniety? What are the steps involved in 2SLS? How would you use
 instrumental variables in 2SLS?
20. Explain the concept of an instrumental variable (IV). What are the required properties for a
valid IV? Explain the process for using an IV in instrumental variable regression. How can you
evaluate the strength of an instrument?
21. How does Limited Dependent Variable Models relate with Interaction Effects?

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