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PS2

The document is a problem set for an Econometrics course at Bilkent University, focusing on simple linear regression models. It includes various tasks such as deriving least squares estimators, analyzing regression coefficients, and interpreting results from a regression of average weekly earnings on age. The problems require understanding of OLS techniques, error terms, and the implications of regression outputs.

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Muhammed Yıldırım
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4 views1 page

PS2

The document is a problem set for an Econometrics course at Bilkent University, focusing on simple linear regression models. It includes various tasks such as deriving least squares estimators, analyzing regression coefficients, and interpreting results from a regression of average weekly earnings on age. The problems require understanding of OLS techniques, error terms, and the implications of regression outputs.

Uploaded by

Muhammed Yıldırım
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Econ 301 Bilkent University

Econometrics Department of Economics

Problem Set 2 Spring 2025

1- Wooldridge 2.2
In the simple linear regression model 𝑦 = 𝛽0 + 𝛽1 𝑥 + 𝑢, suppose that E(u)≠ 0. Letting α0 = E(u),
show that the model can always be rewritten with the same slope, but a new intercept and error,
where the new error has a zero expected value.

2- Please derive the least squares estimator of 𝛽0 for the model: 𝑦 = 𝛽0 + 𝑢 .

3- Stock and Watson 4.11 (Regression Though Origin)

Please derive the least squares estimator of 𝛽1 for the model: 𝑦 = 𝛽1 𝑥 + 𝑢 (no constant term).

4- Suppose that you are able to observe n data points on 𝑦𝑖 and 𝑥𝑖 in the simple linear regression
model.
𝑦𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 + 𝑢𝑖

a. Derive the formula for 𝛽0 and 𝛽1 by OLS technique.


b. Show that ∑𝑛𝑖=1 𝑢̂𝑖 = 0 and ∑𝑛𝑖=1 𝑢̂𝑖 𝑥𝑖 = 0
c. Show that 𝑦̂𝑖 = 𝑦𝑖
d. Show that ∑(𝑥𝑖 − 𝑥)(𝑦𝑖 − 𝑦) = ∑(𝑥𝑖 − 𝑥)𝑦𝑖
e. What is the variance of 𝛽1 . Derive the formula using Gauss Markov assumptions.

5- Stock and Watson 4.3

The regression of average weekly earnings (AWE, measured in dollars) on age (measured in years) using a
random sample of size 25 of college educated full time workers aged 25-65 yields the following:

̂ = 696.7 + 9.6𝐴𝐺𝐸, 𝑅2 = 0.023, 𝜎̂ = 624.1


𝐴𝑉𝐸
(se(𝛽̂0 ):220.2) (se(𝛽̂1 ):1.4)

a. Explain what the coefficient values 696.7 and 9.6 mean.


b. The standard error of the regression 𝜎̂ is 624.1. What are the units of measurement of the 𝜎̂?
(Dollars? Years? Or 𝑖𝑠 𝜎̂ unit free?)
c. What does the regression predict will be if the earnings for a 25 year old worker? For a 45 year old
worker?
d. Will the regression give reliable predictions for a 99 year old worker? Why or why not?
e. The average age in this sample is 41.6 years. What is the average value of AWE in the sample?
f. The regression 𝑅2 is 0.023. What are the units of measurement for 𝑅2? (Dollars? Years? Or 𝑖𝑠 𝜎̂
unit free?) Interpret this number .

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