Lahore School of Economics
Econometrics I
Problem Set III, BSc III – B
Due: 10th November, 2010
Advice: Attempt THREE questions per day; starting today!
Chapter 7: Specification: Choosing a Functional Form
Question 5: Attempt the following parts
a. Review the possible functional forms summarized in Section 7.2. What else besides an inverse function could have been used to estimate the model? You may review the literature for tested specifications.
b. From the middle 1970s to early 1980s, a Phillips Curve estimation have shown a positive slope for the US. What inference should be drawn from such a positive unexpected sign? Why?
Question 7: The Cobb-Douglas Production function for various Indian Industries
Question 9: A study of Hotel investments
Question 11: Only attempt parts (b), (c) and (d)
Question 15: Walter Primeaux’s Model of Advertisement Expense
Chapter 8: Multicollinearity
Question 9: Regression of total annual gross sales at J.C. Quarter’s
Question 11: Modeling GPA of students
Question 13: Modeling salaries of elementary school teachers
Additional Questions
1. In a study relating college grade point average to time spent in various activities, you distribute a survey to several students. The students are asked how many hours they spend each week in four activities: studying, sleeping, working, and leisure. Any activity is put into one of the four categories, so that for each student the sum of hours in the four activities must be 168.
(i) In the model
does it make sense to hold sleep, work, and leisure fixed, while changing study?
(ii) Explain why this model violates Assumption MLR.4.
(iii) How could you reformulate the model so that its parameters have a useful interpretation and it satisfies Assumption MLR.4?
2. Suppose that average worker productivity at manufacturing firms (avgprod) depends on two factors, average hours of training (avgtrain) and average worker ability (avgabil):
Assume that this equation satisfies the Gauss-Markov assumptions. If grants have been given to firms whose workers have less than average ability, so that avgtrain and avgabil are negatively correlated, what is the likely bias in β1 obtained from the simple regression of avgprod on avgtrain?
3. Using the data in RDCHEM.RAW, the following equation was obtained by OLS:
a. At what point does the marginal effect of sales on rdintens become negative?
b. Would you keep the quadratic term in the model? Explain.
c. Define salesbil as sales measured in billions of dollars: salesbil=sales/1,000. Rewrite the estimated equation with salesbil and salesbil2 as the independent variables. Be sure to report standard errors and the R-squared. [Hint: Note that salesbil2=sales2/ (1,000)2.]
d. For reporting the results, which equation do you prefer?