1. a) No.

Under multicollinearity, OLS estimator is unbiased and se of OLS

estimator blows up. However, all the classical assumptions are correct. The t test
should be valid.
b) No. Under heterskedasticity, OLS estimator is unbiased but se of OLS
estimator should take a different form. Hence the t test based on the classical formula
of se is invalid.
c) No. Under serial correlation, OLS estimator is unbiased but se of OLS
estimator should take a different form. However, if one uses the Newey-West method
to compute the se of OLS estimator, the t-test will be valid.
d) No, misspecification leads to a biased estimator for OLS. This is why the t test
based on the OLS estimator is invalid.
e) No. Under linear probability model, there is heterskedasticity. OLS estimator is
unbiased but se of OLS estimator should take a different form. However, if one uses
the White method to compute the se of OLS estimator, the t-test will be valid.

2. a) Holding other variables constant, when the annual Australian wage income
increases by 1 billions of Australian dollars, annual Australian domestic
consumption will increase by 0.95 billions of Australian dollars. Similarly, we can
interpret the other two estimated coefficients.
b) The t statistics are 1, 0.682, 0.111 respectively. At the 5% level the one sided
CV from the t distribution with 19 degrees of freedom is 1.729. So none of the
coefficients is statistically significant.
c) 95% variation in C can be explained by the variation in w, p and a altogether.
F=120.33. At the 5% level the CV of the F distribution with 3 and 23 degrees
of freedom is 3.13. So we reject the null of insignificant model.
d) Multicollearity. ses of OLS estimator blow up. Yes, I am concerned with this
problem since it makes the t ratios too small and hence we tend to conclude the
independent variables are insignificant.
e) Regress w on p and a. See if the value of R square is high. Either use an F test
or calculate VIF.
f) Let c*=1000c, w*=1000w, p*=1000p, a*=a*1000. If we multiply both sides of
the estimated equation by 1000, we get

c*=8133+0.95w*+0.452p*+0.12a*

Hence, our new estimated coefficients are 8133, 0.95, 0.452, 0.12.
g) Adjusted R square for Model (1) is 0.942. It is 0.790 for Model (2). Also, from
view point of economic theory, a should be a relevant variable. So I prefer Model
(1).

3. a) Yes, it is.
1........if ..i..is..Chinese..male
D1i D2i =
0..................otherwise........

b) E (Yi | i..is..a..non chinese.. female) = 0 + 1 X i

 c) E (Yi | i..is..a..chinese.. female) = 0 + 1 X i + 3

d) E (Yi | i..is..a..non chinese..male) = 0 + 1 X i + 2

e) E (Yi | i..is..a..chinese..male) = 0 + 1 X i + 2 + 3 + 4

f) The difference between non-Chinese female and Chinese female is beta2. The
difference between non-Chinese female and non-Chinese male is beta3. However, the
difference between non-Chinese female and Chinese male is not beta2+beta3. Instead
it is beta2+beta3+beta4. So there is extra discrimination in favor of Chinese male
when beta4 is positive.

g) A1=8, A2=6. A3=2.326, A4=1.645. A5=0.1. A6=0.02.

h) (1.2-0.2*1.96, 1.2+0.2*1.96). With the 95% confidence the true slope

parameter will be contained by the interval.

i) Everything will be multiplied by 1000.