Principles of Econometrics (721066S), Assignment set 1, Solutions

(5.11.2020)
1.
a) E(Y)= 0.88
b) 0.12
c) The conditional expectations are: 0.831 and 0.896
d) 0.169 and 0.104
e) 0.35 and 0.65
f) Educational achievement and employment status to be independent they need to satisfy, for all
values of x and y,
Pr(𝑋 = 𝑥|𝑌 = 𝑦) = Pr(𝑋 = 𝑥)

2.
Value of Y Probability
distribution
2 4 6 8 10 of X
3 0.04 0.09 0.03 0.12 0.01 0.29
Value of X 6 0.10 0.06 0.15 0.03 0.02 0.36
9 0.13 0.11 0.04 0.06 0.01 0.35
Probability
0.27 0.26 0.22 0.21 0.04 1.00
distribution of Y

a) The probability distribution is given in the table above.

mean: 𝐸(𝑌) = 4.98

variance: 𝑣𝑎𝑟(𝑌) = 5.8

b) The conditional probability of Y|X=6 is given in the table below

Value of Y
2 4 6 8 10
0.10/0.36 0.06/0.36 0.15/0.36 0.03/0.36 0.02/0.36

𝐸(𝑌|𝑋 = 6) = 4.944
𝑣𝑎𝑟(𝑌|𝑋 = 6) = 5.244

c) 𝑐𝑜𝑣(𝑋, 𝑌) = −1.3764

Correlation: 𝑐𝑜𝑟𝑟(𝑋, 𝑌) = −0.1949 NB the correct answer is -0.239

3.
a) 0.9382
b) 0.9962
c) 0.1606

4.
a) 𝜇 = 0.065; 𝜎 = 0.044
b) 𝜇 = 0.0725; 𝜎 = 0.056
c) 𝑤 = 1, 𝜎 = 0.07
d) 𝑤 = 0.18, 𝜎𝑅 = 0.038.

Empirical exercise:
a)
YR01 Mean Std. Dev. Obs.
0 11.63216 5.607188 7612
1 19.79261 10.67980 7440
All 15.66576 9.429721 15052

b) Change: 8.16, 95% CI: {7.89; 8.43}

c)
0 19.03595 9.176125 7612
1 19.79261 10.67980 7440
All 19.40996 9.954681 15052

Change: 0.76, 95% CI: {0.44; 1.08}

e)
0 15.68666 8.217372 3485
1 23.41062 11.27548 3955
All 19.79261 10.67980 7440

f) Difference: 7.28, NB! the correct difference is 7.72, 95% CI: {7.28; 8.16}
g)
BACHELOR Mean Std. Dev. Obs.
0 16.34804 7.531796 4650
1 23.25566 9.909940 2962
All 19.03595 9.176125 7612

Difference: 6.92, 95% CI: {6.50; 7.34}