BSc-III

Econometrics I (ECO 204)

Quiz 3
Spring 2021
Azam Chaudhry Aimal Tanvir
Name: _________________ Section: _______
Total Marks: 30 marks

This dataset contains data on 177 chief executive officers and can be used to examine the effects of firm
performance on CEO salary.

Where;
Salary = 1990 compensation, $1000s
Sales = 1990 firm sales, millions
Ceoten = years as ceo with company
Grad=1 if attended graduate school; 0 otherwise
Table 1
. reg salary sales sales_sq ceoten grad

Source SS df MS Number of obs = 177

F(4, 172) = 18.44
Model 18237289.2 4 4559322.3 Prob > F = 0.0000
Residual 42528675.6 172 247259.742 R-squared = 0.3001
Adj R-squared = 0.2838
Total 60765964.7 176 345261.163 Root MSE = 497.25

salary Coef. Std. Err. t P>|t| [95% Conf. Interval]

sales .0488043 .0136286 3.58 0.000 .0219035 .0757051

sales_sq -6.23e-07 3.61e-07 -1.73 0.086 -1.33e-06 8.87e-08
ceoten 13.8164 5.254146 2.63 0.009 3.44549 24.18731
grad 394.7453 80.41745 4.91 0.000 236.0131 553.4774
_cons 384.725 74.47642 5.17 0.000 237.7195 531.7304

a) We have incorporated only one dummy variable accounting for whether the CEO attended
graduate school or not where grad=1 if attended graduate school and 0 otherwise. Explain why
we have not added in another dummy to the same regression that takes a value of 1 if the CEO
did not attend graduate school and equal to 0 if the CEO did attend graduate school. (4 marks)

Page 1 of 3
 b) Using the above results, what is the average number of earnings for CEOs who did attend
graduate school? (3 marks)

c) Using the above results, what is the difference in the number earnings between CEOs who have
attended graduate schools as compared to those who have not? (2 marks)

d) Interpret the coefficient on graduate. (3 marks)

Table 2
. reg salary ceoten grad

Source SS df MS Number of obs = 177

F(2, 174) = 23.23
Model 12804760.3 2 6402380.16 Prob > F = 0.0000
Residual 47961204.4 174 275639.106 R-squared = 0.2107
Adj R-squared = 0.2017
Total 60765964.7 176 345261.163 Root MSE = 525.01

salary Coef. Std. Err. t P>|t| [95% Conf. Interval]

ceoten 12.45706 5.535327 2.25 0.026 1.532032 23.38209

grad 518.2915 80.02174 6.48 0.000 360.3533 676.2297
_cons 465.1663 75.80158 6.14 0.000 315.5574 614.7752

e) Using the results in Tables 1 and 2, are the two sales variables jointly significant at the 5% level?
Show all your working. (𝐹0.05,2,437 =3.00) (5 marks)

. sum salary if grad==1

Variable Obs Mean Std. Dev. Min Max

salary 103 1081.058 666.2312 218 5299

. sum salary if grad==0

Variable Obs Mean Std. Dev. Min Max

salary 74 566.3378 236.5007 100 1100

The above data corresponds to a dummy variable named “grad” that is =1 if CEO attended graduate
school and =0 if the CEO did not attend graduate school and only attended college.

Page 2 of 3
e. Write a regression equation that acknowledges this relationship between salary and dummy if
attended graduate school. (3 marks)

f. Write a regression equation that acknowledges this relationship between salary and the dummy
college which =1 if the CEO did not attend graduate school and only attended college and =0 if
the CEO attended graduate school. (hint: think of how college would be coded relative to grad.)
(4 marks)

g. Interpret the coefficient on the dummy college. (2 marks)

Table 3
. reg salary sales sales_sq ceoten grad ceoten_grad

Source SS df MS Number of obs = 177

F(5, 171) = 15.82
Model 19218135.4 5 3843627.08 Prob > F = 0.0000
Residual 41547829.3 171 242969.762 R-squared = 0.3163
Adj R-squared = 0.2963
Total 60765964.7 176 345261.163 Root MSE = 492.92

salary Coef. Std. Err. t P>|t| [95% Conf. Interval]

sales .0488838 .0135099 3.62 0.000 .0222162 .0755514

sales_sq -6.02e-07 3.58e-07 -1.68 0.094 -1.31e-06 1.04e-07
ceoten 4.28013 7.046583 0.61 0.544 -9.62936 18.18962
grad 225.4278 116.0015 1.94 0.054 -3.551446 454.407
ceoten_grad 21.01487 10.45929 2.01 0.046 .3689148 41.66082
_cons 461.9552 83.23459 5.55 0.000 297.6557 626.2548

h. Now we have added an interaction term between grad and ceoten called ceoten_grad. Explain
what difference did it make than simply using grad and ceoten. (4 marks)

Page 3 of 3