Problem Set 3 (Due date: Apr 3)

1 The questions are from our textbook (Introduction to Econometrics 2nd Edition, Stock and Watson). Exercises 6.1 6.4. and 6.11. 2 Consider the regression model yi = 0 + 1 X1i + 2 X2i + ui . Construct a t-statistic to test (a) 1 = 2 . (b) 1 + a2 = 0, where a is a constant. (c) 1 + 2 = 1. 3 In a 1994 research paper, two economists examined the impact of looks on earnings using interviewers ratings of respondents physical appearance. They used data in which respondents reported their wages, and the interviewers rated the respondents appearance, using ve categories: (1. homely, 2. quite plain, 3. average, 4. good looking and 5. strikingly handsome or beautiful). Download the le beauty.xls from the course web page. The le contains the following variables: hourly earning, looks, female (is equal to 1 if female, 0 otherwise) and years of education. Assume that a population consists of all individuals in the data set. (a) Estimate the following regression ernhr = + looks + yrseduc + u using the population data (i.e. use all data). What is the value of (estimated) ? Denote this value as 0 . Construct the 95% condence interval. (b) (optional) First, draw a simple random sample of size 100. Second, estimate the regression model using the sample you obtained. Then, test the null hypothesis H0 : = 0 against H1 : = 0 at 5% level. Let reject be a dummy variable indicating whether H0 is rejected (reject=1 if H0 is rejected). Save and the dummy variable reject. (c) (optional) Repeat (b) 1000 times. Thus, you will have and reject at each round. (d) (optional) Graph the histogram of . Is it close to be normal? (e) (optional) Is the mean of reject close to be 5%?