Applied Economic Analysis

Seminar written exercise

To be handed in at the start of your seminar in week 9
Handwritten answers will be accepted
Data is collected on the weekly expenditure on restaurant meals from a sample of
275 individuals. The variables are:
y:
x:
rural:
semirural:
urban:

Expenditure on restaurant meals in pounds per week

Income in pounds per week
= 1 if the individual lives in a rural area, = 0 otherwise.
= 1 if the individual lives in a semirural area, = 0 otherwise.
= 1 if the individual lives in an urban area, = 0 otherwise.

A regression model is estimated and the following results obtained.

Model Summary
Model
dimension0

R Square Adjusted R Square Std. Error of the Estimate

.478a

.229

.220

126.51401

a. Predictors: (Constant), semirural, x, urban

Coefficientsa
Model

Standardized
Unstandardized Coefficients
B

(Constant)

Std. Error

-62.760

19.501

.243

.029

urban

52.127

semirural

32.583

Coefficients
Beta

Sig.

-3.218

.001

.444

8.289

.000

17.645

.176

2.954

.003

19.677

.099

1.656

.099

a. Dependent Variable: y

a)

Interpret the parameter estimates for the three explanatory variables (rural is
the base case).

b)

Consider the two scatterplots below; the first plots the relationship between
income (x) and expenditure on restaurant meals (y); the second the
relationship between the residuals and income (x). Do these scatterplots
suggest that there may be a problem of heteroskedasticity in a model that
includes the income variable? Explain your answer.

(c)

The Park Test is a formal test for heteroskedasticty. This involves a

regression of the log-squared residual on log income. The results of this
regression model are reported below.

Coefficientsa
Model

Standardized
Unstandardized Coefficients
B

(Constant)
lnincome

Coefficients

Std. Error
-4.345

1.179

2.007

.191

Beta

.536

Sig.

-3.684

.000

10.485

.000

a. Dependent Variable: lnres2

Is there evidence of heteroskedasticity in the model?

(d)

Does the presence of heteroskedasticity violate one of the Gauss Markov

assumptions?
Explain your answer.
What implications would
heteroskedasticity have for the regression results reported in (a)?

(e)

If heteroskedasticity were to take the form:

Var (ui ) 2 x i4
Explain how you would transform the model so that it is homoskedastic and
show that after the transformation Var (ui ) 2 .