ECON20110

THE UNIVERSITY OF MANCHESTER

ECON20110 Econometrics
Semester 1 2017/18 Paper

DO NOT REMOVE FROM EXAMINATION ROOM

1 Hour and 30 minutes

Date:
Time:

Statistical tables can be found after the questions.

Answer all 4 Questions

All questions are worth 25 marks

Please complete your answers in the Answer Books provided. Note you will not be permitted
to do this after the end of the exam.

Candidates are advised that the examiners attach considerable importance to the
clarity with which answers are expressed

Electronic calculators may be used, provided that they cannot store text.
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Answer all 4 questions

1. Consider the simple linear regression model:

y i = α + β x i + ui

where yi and xi are observed variables, ui is an unobserved error term, and i = 1, . . . , n.

(a) State the OLS estimators for α and β for this model.
[3 MARKS]
(b) The following results are obtained for a sample of 640 observations.
n
X n
X
(xi − x̄)yi = 122.1 (yi − ȳ)2 = 1168.6
i=1 i=1
n
X
(xi − x̄)2 = 142.8 σ̂ 2 = 1.67 x̄ = 0.03359 ȳ = 9.1386
i=1

where x̄, ȳ are the sample means of x and y respectively, and σ̂ 2 is the estimate for
the error variance.
Find the Ordinary Least Squares (OLS) estimates for β̂ and its standard error s.e.(β̂).
[7 MARKS]
(c) Which of the Gauss-Markov assumptions are required to show that the OLS estimator
β̂ exists and is an unbiased estimator for β.
[5 MARKS]
(d) Show that the total sum of squares (SST) can be decomposed into the sum of the
explained sum of squares (SSE) and the residual sum of squares (SSR), i.e. show
that SST = SSE + SSR. Clearly explain where you use the the OLS first order
conditions in your working.
[10 MARKS]

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2. Consider a general linear regression model:

y = Xβ + u

where
 y is a (50 × 1) vector containing observations on the dependent variable, β =
β1
 β2 , and X is a (50 × 3) matrix containing a column of ones and observations on
 

β3
two explanatory variables. The following are obtained:

   
50 269 267 1354.6
(X 0 X) =  269 1765 1380  (X 0 y) =  7536.4 
   

267 1380 1829 8486.9

 
0.2119 −0.0198 −0.0160
0 −1
(X X) =  −0.0198 0.0032 0.0005  SSR = 49.52
 

−0.0160 0.0005 0.0025

where SSR is the OLS sum of squared residuals.

(a) (i) Compute the OLS estimate β̂.
[5 MARKS]
(ii) Compute the standard error for β̂2 .
[4 MARKS]
(iii) Test the null hypothesis H0 : β2 = 1.6 versus HA : β2 6= 1.6 at a 5% significance
level. Clearly state your test statistic, the relevant distribution and critical value,
and your conclusion.
[5 MARKS]
(b) (i) We also get the following value for the total sum of squares, SST = 4524.9.
Calculate the value for R2 .
[3 MARKS]
(ii) Test the joint significance of both explanatory variables in the model. Clearly
state the null and alternative hypotheses, and calculate the required test statis-
tic. What do you conclude?
[8 MARKS]

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3. Consider the following fertility model based on 4361 household-level observations from
Botswana’s 1998 Demographic and Health Survey:

children = β0 + β1 educ + δ0 religion + δ1 religion ∗ educ + u,

where children is the number of children born to the household, educ is the number
of years of mother’s education, and religion is a dummy variable taking the value 1
if the household identifies as being religious and 0 otherwise. It is assumed that the
Gauss-Markov assumptions hold.
The R output from this regression is:

Call:
lm(formula = children ~ educ + religion + I(educ * religion),
data = fertility)

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 3.449444 0.064672 53.337 <2e-16
educ -0.218007 0.009955 -21.900 <2e-16
religion 0.270810 0.131259 2.063 0.0392
I(educ * religion) 0.002396 0.017321 0.138 0.8900

Residual standard error: 2.06 on 4357 degrees of freedom

Multiple R-squared: 0.1408, Adjusted R-squared: 0.1402
F-statistic: 238 on 3 and 4357 DF, p-value: < 2.2e-16

(a) Write down the fitted model for this regression. What is the predicted number of
children born to a non-religious household where the mother has 6 years of eduction?
[4 MARKS]
(b) Interpret each of the parameters, β0 , β1 , δ0 , and δ1 in this model.
[6 MARKS]

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(c) Conduct a test of the null hypothesis H0 : δ0 ≤ 0 against the alternative H1 : δ0 > 0.
Use a significance level of 5%. Clearly state the test statistic and its distribution, the
relevant critical value, and your decision rule. Using you interpretation of δ0 from
the previous part, what do you conclude?
[7 MARKS]
(d) The following regression is also run:
Call:
lm(formula = children ~ educ, data = fertility)

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 3.49554 0.05612 62.28 <2e-16
educ -0.20965 0.00796 -26.34 <2e-16

Residual standard error: 2.064 on 4359 degrees of freedom

Multiple R-squared: 0.1373,Adjusted R-squared: 0.1371
F-statistic: 693.7 on 1 and 4359 DF, p-value: < 2.2e-16
Use the output from both regressions to test whether or not religion has any impact
on fertility rates. Use a 5% significance level. Clearly state your null and alternative
hypotheses, your test statistic and distribution, and your decision rule. What do you
conclude?
[8 MARKS]

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4. Consider the following model of how the number of visitors to shopping centers determines
the sales activity within the shopping center:

log(salesi ) = β0 + β1 f ootf alli + β2 sizei + ui (1)

where salesi is the total annual sales from all shops in indoor shopping center i, f ootf alli
is the number of shoppers visiting i, and sizei is the floor area of shopping center i.
(a) (i) What is the interpretation of the parameter β1 ?
[2 MARKS]
(ii) It is suggested that the variable f ootf alli is endogenous in model (1). There-
fore, a colleague suggests that you could use the average rainfall in the region
of the shopping center as an instrument. Using the assumptions required for
a valid intrument, argue whether using the amount of rain could be a suitable
instrument for the variable f ootf alli in model (1). Which of these assumptions
can we test?
[10 MARKS]
(b) Another colleague obtains repeated observations on the same shopping centers over
a number of years. She proposes the following model instead:

log(salesit ) = β0 + β1 f ootf allit + β2 sizei + αi + uit (2)

where αi represents the unobserved heterogeneity of individual shopping centers.

(i) Explain why αi being correlated with the number of visitors would cause the
endogeneity assumed in model (1).
[2 MARKS]
(ii) Explain how a Fixed Effects estimator on model (2) can be used to eliminate
this unobserved heterogeneity.
[8 MARKS]
(iii) Can we determine the effect of the size of shopping centers on their total sales
using Fixed Effects? Explain.
[3 MARKS]
END OF EXAMINATION

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Table 1: Critical values of the t distribution

Significance Level
1-tailed 0.1 0.05 0.025 0.01 0.005
2-tailed 0.2 0.1 0.05 0.02 0.01
Degrees of
freedom
1 3.078 6.314 12.706 31.821 63.657
5 1.476 2.015 2.571 3.365 4.032
10 1.372 1.812 2.228 2.764 3.169
15 1.341 1.753 2.131 2.602 2.947
20 1.325 1.725 2.086 2.528 2.845
30 1.310 1.697 2.042 2.457 2.750
40 1.303 1.684 2.021 2.423 2.704
60 1.296 1.671 2.000 2.390 2.660
90 1.291 1.662 1.987 2.368 2.632
120 1.289 1.658 1.980 2.358 2.617
∞ 1.282 1.645 1.960 2.326 2.576

Table 2: 5% critical values of the F distribution

Numerator degrees of freedom
1 2 3 4 5 6 7 8 9
Denominator
degrees of
freedom
10 4.96 4.10 3.71 3.48 3.33 3.22 3.14 3.07 3.02
20 4.35 3.49 3.10 2.87 2.71 2.60 2.51 2.45 2.39
40 4.08 3.23 2.84 2.61 2.45 2.34 2.25 2.18 2.12
60 4.00 3.15 2.76 2.53 2.37 2.25 2.17 2.10 2.04
90 3.95 3.10 2.71 2.47 2.32 2.20 2.11 2.04 1.99
120 3.92 3.07 2.68 2.45 2.29 2.18 2.09 2.02 1.96
150 3.90 3.06 2.66 2.43 2.27 2.16 2.07 2.00 1.94
500 3.86 3.01 2.62 2.39 2.23 2.12 2.03 1.96 1.90
∞ 3.84 3.00 2.60 2.37 2.21 2.10 2.01 1.94 1.88

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Table 3: 1% critical values of the F distribution

Numerator degrees of freedom
1 2 3 4 5 6 7 8 9
Denominator
degrees of
freedom
10 10.04 7.56 6.55 5.99 5.64 5.39 5.20 5.06 4.94
20 8.10 5.85 4.94 4.43 4.10 3.87 3.70 3.56 3.46
40 7.31 5.18 4.31 3.83 3.51 3.29 3.12 2.99 2.89
60 7.08 4.98 4.13 3.65 3.34 3.12 2.95 2.82 2.72
90 6.93 4.85 4.01 3.53 3.23 3.01 2.84 2.72 2.61
120 6.85 4.79 3.95 3.48 3.17 2.96 2.79 2.66 2.56
150 6.81 4.75 3.91 3.45 3.14 2.92 2.76 2.63 2.53
500 6.69 4.65 3.82 3.36 3.05 2.84 2.68 2.55 2.44
∞ 6.63 4.61 3.78 3.32 3.02 2.80 2.64 2.51 2.41

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