Econ 3044: Introduction to Econometrics

Exercise 1
AAUSC, Department of Economics

November, 2019

1. Show that
n
X
(Xi − X) = 0.
i=1

2. Show that
n
X n
X n
X n
X
(Xi −X)(Yi −Y ) = (Xi −X)Yi = Xi (Yi −Y ) = Xi Yi −nX Y .
i=1 i=1 i=1 i=1

3. Suppose the following equation describes the relationship between the

average number of classes missed during a semester (missed) and the
distance from school (distance, measured in miles):

missed = 3 + 0.2 distance

(a) What are the slope and intercept of this function? How do you
interpret the intercept in this equation?
(b) What is the average number of classes missed for someone who
lives five miles away?
(c) What is the difference in the average number of classes missed
for someone who lives 10 miles away and someone who lives 20
miles away?

4. Which of the following models can be estimated using ordinary least

squares (OLS), where X, Y , Z are variables and α, β, γ are param-
eters to be estimated? (Hint: the models need to be linear in the
parameters.)

(a) Yi = α + βXi + ui
(b) Yi = eα Xiβ eui
(c) Yi = α + βγXi + ui
(d) Yi = α + β ln Xi + ui

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 (e) Yi = α + βXi Zi + ui
5. Let kids denote the number of children ever born to a woman, and
let educ denote years of education for the woman. A simple model
relating fertility to years of education is

kids = β0 + β1 educ + u,

where u is the unobserved error.

(a) What kinds of factors are contained in u? Are these likely to be
correlated with level of education?
(b) Will a simple regression analysis uncover the ceteris paribus effect
of education on fertility? Explain.
6. Suppose that a researcher, using data on class size (CS) and average
test scores from 100 third-grade classes, estimates the OLS regression,
\ = 520.4 − 5.82 CS
T estScore
R2 = 0.08, SSR = 11.5

where SSR is the residuals sum of squares.

(a) A classroom has 22 students. What is the regression’s prediction
for that classroom’s average test score?
(b) Last year the classroom had 19 students, and this year it has 23
students. What is the regression’s prediction for the change in
the classroom average test score?
(c) The sample average class size across the 100 classrooms is 21.4.
What is the sample average of the test scores across the 100
classrooms? (Hint: Review the formulas for the OLS estimators.)
(d) What is the sample standard deviation of test scores across the
100 classrooms? (Hint: Review the formulas for the R2 and
SSR.)
7. (You can use Excel to answer this question.) The following table
contains the ACT scores and the GP A (grade point average) for eight
college students. Grade point average is based on a four-point scale
and has been rounded to one digit after the decimal.

(a) Estimate the relationship between GP A and ACT using OLS;

that is, obtain the intercept and slope estimates in the equation

GP
[ A = β̂0 + β̂1 ACT

Comment on the direction of the relationship. Does the intercept

have a useful interpretation here? Explain. How much higher is

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 Student GPA ACT
1 2.8 21
2 3.4 24
3 3.0 26
4 3.5 27
5 3.6 29
6 3.0 25
7 2.7 25
8 3.7 30

the GPA predicted to be if the ACT score is increased by five

points?
(b) Compute the fitted values and residuals for each observation, and
verify that the residuals (approximately) sum to zero.
(c) What is the predicted value of GP A when ACT = 20?
(d) How much of the variation in GP A for these eight students is
explained by ACT ? Explain.

8. The data set BWGHT contains data on births to women in the United
States. Two variables of interest are the dependent variable, infant
birth weight in ounces (bwght), and an explanatory variable, average
number of cigarettes the mother smoked per day during pregnancy
(cigs). The following simple regression was estimated using data on
n = 1, 388 births:
\ = 119.77 − 0.514 cigs
bwght

(a) What is the predicted birth weight when cigs = 0? What about
when cigs = 20 (one pack per day)? Comment on the difference.
(b) Does this simple regression necessarily capture a causal relation-
ship between the child’s birth weight and the mother’s smoking
habits? Explain.
(c) To predict a birth weight of 125 ounces, what would cigs have to
be? Comment.
(d) The proportion of women in the sample who do not smoke while
pregnant is about .85. Does this help reconcile your finding from
part (c)?
9. The following equation relates housing price (price) to the distance
from a recently built garbage incinerator (dist):
\ = 9.40 + 0.312 log(dist)
log(price)
n = 135, R2 = 0.162.

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 (a) Interpret the coefficient on log(dist). Is the sign of this estimate
what you expect it to be?
(b) Do you think simple regression provides an unbiased estimator of
the ceteris paribus elasticity of price with respect to dist? (Think
about the city’s decision on where to put the incinerator.)
(c) What other factors about a house affect its price? Might these
be correlated with distance from the incinerator?

10. Assume that the following data have been calculated from a regression
of Y on a single variable X and a constant over 22 observations
X
Xi Yi = 830102, X = 416.5, Y = 86.65,

X
Xi2 = 3919654, SSR = 130.6

Determine the appropriate values of the coefficient estimates and their

standard errors.

11. (a) Regression through the origin: Suppose you are given the
model without an intercept, Yi = β1 Xi + ui . Show that
P
Xi Yi
β̃1 = P 2
Xi

is the OLS estimator of the slope intercept. (Hint: Use single

variable calculus to minimize the sum of squared residuals.)
(b) Regression on a constant: Suppose you are given the model
without any regressor: Yi = β0 + ui . Show that β̃0 = Y , that
is, the sample average minimizes the sum of squared residuals.
(Hint: You may use one-variable calculus or you can show the
result directly by adding and subtracting Y inside the squared
residual and then doing a little algebra.)

12. (a) Let β̂0 and β̂1 , be the intercept and slope from the regression of
Yi on Xi , using n observations. Let c1 and c2 , with c2 6= 0, be
constants. Let β̃0 and β̃1 be the intercept and slope from the
regression of c1 Yi on c2 Xi . Show that
 
c1
β̃1 = β̂1 and β̃0 = c1 β̂0 ,
c2

thereby verifying the claims on units of measurement discuss in

class. [Hint: To obtain β̃1 , plug the scaled versions of X and Y
into the OLS formula for β̂1 . Then, use the OLS formula for β̂0 ,
being sure to plug in the scaled X and Y and the correct slope.]

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 (b) Now, let β̃0 and β̃1 be from the regression of (c1 + Yi ) on (c2 + Xi )
(with no restriction on c1 or c2 ). Show that

β̃1 = β̂1 and β̃0 = β̂0 + c1 − c2 β̂1 .

13. Let β̂0 and β̂1 be the OLS intercept and slope estimators, respectively,
and let u be the sample average of the errors (not the residuals!).

(a) Which Gauss-Markov assumptions are required to establish the

unbiasedness of β̂0 and β̂1 ?
(b) Prove that, given the Gauss-Markov assumptions in part (a), the
OLS estimator β̂0 is an unbiased estimator of β0 . [Hint: Average
the PRF, Yi = β0 + β1 Xi + ui , across i and plug the result into
the formula for β̂0 .]
P P P
(c) Use β̂1 = β1 + (1/SSTx ) di ui , along with di = (Xi −X) =
0, to show that β̂1 and u are uncorrelated. [Hint: You are being
asked to show that E[(β̂1 − β1 ) · u] = 0.]
(d) Use parts (b) and (c) to show that

σ2 σ2 2
Var(β̂0 ) = + X .
n SSTx

(e) Do the algebra to simplify the expression in part (d) to get

P 2
Xi
Var(β̂0 ) = P σ2.
n (Xi − X) 2