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Quiz 2A
Econometrics I
BSc-III
Lahore School of Economics
SOLUTION
Name: ______________________ Section: _____
Total Marks: 40 marks
Crime1.RAW contains data on arrests during the year 1986 and other information on 2,725 men
born in either 1960 or 1961 in California. Each man in the sample was arrested at least once prior
to 1986. The variable narr86 is the number of times the man was arrested during 1986: it is zero
for most men in the sample (72.29%) and it varies
from 0 to 12. The variable ptime86 is months spent in prison in 1986 and qemp86 is the number
of quarters during which man was employed in 1986.
A linear model explaining arrests is:
narr 86=β 0 + β 1 qemp 86+ β 2 ptime 86+ μ

a. What are the most likely signs for β 1∧β 2 ? (4 marks)

β 1< 0
Greater the number of quarters during which the man was employed in 1986, lower would be
the number of times the man was arrested in 1986. Being employed would result in lower crimes
committed by the person for money.

β 2< 0
More months spent in prison would suggest less time spent outside of prison committing crime
as a result lower would be the number of times the man was arrested in 1986.

b. Do you think qemp86 and ptime86 are likely to be correlated? Explain why the
correlation might be positive or negative. (4 marks)

Yes, greater the number of months spent in prison in 1986 lower would be the number of
quarters during which the man is employed in 1986.

qemp86 and ptime86 is negatively correlated.

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c. The regression output for your model is reported below. Discuss your results. Begin by
forming your equation, interpreting your slope estimates, reporting the significance of
your estimates, and explaining the predictive power of your model. (12 marks)

^
narr 86=0.66−0.10 qemp 86−0.036 ptime 86
Another quarter in which legal employment is reported lowers number of arrests by 0.10 units,
ceteris paribus.

As the number of months spent in prison in 1986 increases by one month, the number of times
the man was arrested in 1986 decreases by 0.036units, ceteris paribus.

The predictive power of the model is explained by R2. The variation in the included explanatory
variables helps to explain 3.66% of the variation in the dependent variable (narr86).

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Instead of the regression estimated above you end up estimating the following regression:

d. Do you think the coefficients estimated by this regression are an appropriate way of
estimating the relationship between narr86 and qemp86? Explain why or why not? (5
marks)
No, this is not an appropriate way of estimating the said relationship as the variable ptime86
is related to both narr86 and qemp86. Omitting this relevant variable would result in an
omitted variable bias; hence, the estimated coefficients would be biased.

e. In what direction will omitting ptime86 from a regression of narr86 on qemp86 bias your
estimate of B1? (5 marks)

Corr (narr86, ptime86) < 0 POSITIVE BIAS

Corr (qemp86, ptime86) < 0

f. The power of multiple regression analysis is that it provides a ceteris paribus

interpretation even though the data has NOT been collected in a ceteris paribus fashion.
Explain how can one show that the estimated coefficient of qemp86 in part (c) can be
interpreted as the impact of qemp86 on narr86 while holding ptime86 constant. ( 10
marks)

1. qemp 86=δ 0 + δ 1 ptime 86+ μ

i. δ 1 gives us that part of qemp86 that is beingexplained by ptime 86
ii. The residuals from the above regression will give us that part of qemp86 that is
being left unexplained by ptime86 or the part of qemp86 which is uncorrelated
with ptime86.
2. narr 86=β 0 + β 1 qemp 86(residual¿(1))+ μ
β 1 explains the variation in narr86 that is being explained by the variation in qemp86
while holding ptime86 constant.