BSc-IV

Econometrics II (ECO 205)

Quiz 1
Winter 2021
Name: _________________ Section: _______
Total Marks: 50 marks
Use the values in the table below where required.

Critical values for the t-distribution

Significance level t-critical
10% 1.64
5% 1.96
1% 2.58

Critical values for the F-distribution for

(𝒒, ∞)
(q) Significance level (5%)
1 3.84
2 3
3 2.6
4 2.37
5 2.21
6 2.1

Question 1: 30 marks
Two seniors decided to build a model to help them decide whether to live on campus or not.
They collected data from 533 upper-class students (first-year students were required to live on
campus) and estimated the following equation using the Logit Model:

𝐿: Pr(𝐷𝑖̂
= 1) = 𝐹(4.26 + 0.05𝑈𝑛𝑖𝑡𝑖 − 0.19𝐴𝑙𝑐𝑜𝑖 − 0.87𝑌𝑒𝑎𝑟𝑖 − 0.32𝐺𝑟𝑒𝑘𝑖 )
(0.04) (0.08) (0.12) (0.21)
2
N=533; Pseudo R = 0.43
Where:
𝐷𝑖 = 1 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑙𝑖𝑣𝑒𝑑 𝑜𝑛 𝑐𝑎𝑚𝑝𝑢𝑠, 𝑜 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒.
𝑈𝑛𝑖𝑡𝑖 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑐𝑎𝑑𝑒𝑚𝑖𝑐 𝑢𝑛𝑖𝑡𝑠 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑡𝑎𝑘𝑖𝑛𝑔
𝐴𝑙𝑐𝑜𝑖 = 𝑡ℎ𝑒 𝑛𝑖𝑔ℎ𝑡𝑠 𝑝𝑒𝑟 𝑤𝑒𝑒𝑘 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 𝑎𝑙𝑐𝑜ℎ𝑜𝑙
𝑌𝑒𝑎𝑟𝑖 = 2 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑎 𝑠𝑜𝑝ℎ𝑚𝑜𝑟𝑒, 3 𝑖𝑓 𝑎 𝑗𝑢𝑛𝑖𝑜𝑟, 𝑎𝑛𝑑 4 𝑖𝑓 𝑎 𝑠𝑒𝑛𝑖𝑜𝑟

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𝐺𝑟𝑒𝑘𝑖 = 1 𝑖𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑠𝑡𝑢𝑑𝑒𝑛𝑡 𝑤𝑎𝑠 𝑎 𝑚𝑒𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎 𝑓𝑟𝑎𝑡𝑒𝑟𝑛𝑖𝑡𝑦, 0 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒.
a. Interpret the estimated coefficients of 𝐴𝑙𝑐𝑜 and 𝐺𝑟𝑒𝑘. (4 marks)

b. What is the difference in the predicted probability of living on campus of a sophomore

student who is a member of a fraternity and a sophomore student who is not a member of
a fraternity given that both students do not consume alcohol throughout the week and take
4 academic units? (6 marks)
The same equation was estimated using the Linear Probability Model to compare the results with
the logit estimates. The following is the estimated equation:
̂
𝐿: Pr(𝐷𝑖 = 1) = 0.745 + 0.21𝑈𝑛𝑖𝑡𝑖 − 0.29𝐴𝑙𝑐𝑜𝑖 − 0.78𝑌𝑒𝑎𝑟𝑖 − 0.092𝐺𝑟𝑒𝑘𝑖
(0.05) (0.10) (0.02) (0.24)
2
N=533; R = 0.67

c. Why is the Logit Model preferred over the Linear Probability Model in the case of a binary
dependent variable? (2 marks)

d. Explain how the Logit Model is able to overcome the problem posed by the LPM
̂𝑖 = 1̂ . (4
mentioned in part (c) using the equation for the estimated probability, 𝑃 −𝑌𝑖
1+𝑒
marks)

e. Using the estimates for the LPM, provide an economic interpretation for the variables 𝐴𝑙𝑐𝑜
and 𝐺𝑟𝑒𝑘. (4 marks)

The two seniors also estimated the same equation using the Probit Model.
𝐿: Pr(𝐷𝑖 =̂1) = 𝜑(1.96 + 0.05𝑈𝑛𝑖𝑡𝑖 − 0.071𝐴𝑙𝑐𝑜𝑖 − 0.47𝑌𝑒𝑎𝑟𝑖 − 0.45𝐺𝑟𝑒𝑘𝑖 )
(0.04) (0.08) (0.12) (0.21)
2
N=533; Pseudo R = 0.45
f. Interpret the estimated coefficients of 𝐴𝑙𝑐𝑜 and 𝐺𝑟𝑒𝑘. (4 marks)

g. Using the estimated equation for the Probit Model, what is the difference in the predicted
probability of living on campus of a sophomore student who is a member of a fraternity
and a sophomore student who is not a member of a fraternity given that both students do
not consume alcohol throughout the week and take 4 academic units? (6 marks)

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Question 2: 10 marks

In the process of collecting weight and height data from 29 female and 81 male students at your
university, you also asked the students for the number of siblings they have. Although it
was not quite clear to you initially what you would use that variable for, you construct a
new theory that suggests that children who have more siblings come from poorer families
and will have to share the food on the table. Although a friend tells you that this theory
does not pass the “straight-face” test, you decide to hypothesize that peers with many
siblings will weigh less, on average, for a given height. In addition, you believe that the
muscle/fat tissue composition of male bodies suggests that females will weigh less, on
average, for a given height. To test these theories, you perform the following regression:
̂
𝑆𝑡𝑢𝑑𝑒𝑛𝑡𝑤 =–229.92 – 6.52  Female + 0.51  Sibs+ 5.58  Height,
(44.01) (5.52) (2.25) (0.62)
R2=0.50, SER = 21.08
where Studentw is in pounds, Height is in inches, Female takes a value of 1 for females
and is 0 otherwise, Sibs is the number of siblings (heteroskedasticity-robust standard
errors in parentheses).

(a) Carrying out hypotheses tests using the relevant t-statistics to test your two claims
separately, is there strong evidence in favor of your hypotheses? Is it appropriate to use
two separate tests in this situation?

b) Test for the overall significance of the regression. Carefully state all the steps while
answering this question.

Question 3: 10 marks
You have estimated an earnings function, where you regressed the log of earnings on a set of
continuous explanatory variables (in levels) and two binary variables, one for gender and the
other for marital status. One of the explanatory variables is education.

(a) Interpret the education coefficient. (2 marks)

(b) Next, specify the binary variables and an equation, where the default is a single male,
without allowing for interaction between marital status and gender. Indicate the
coefficients that measure the effect of a single male, single female, married male, and
married female. (4 marks)

(c) Finally allow for an interaction between the gender and marital status binary variables.
Repeat the exercise of writing down the various effects based on the female/male and
single/married status. Why is the latter approach more general than the former? (4 marks)

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