Problem Set 4

Econometrics (30413)

Spring 2021

Theory Questions

Question 1

Consider a model where the outcome variable y is binary


1

if the individual is graduated
yi =
0

if the individual is not graduated

and we have a linear model explaining y as a function of explanatory variables x

yi = Xi β + εi

a) Assume E(εi | Xi ) = 0, and derive E(yi | Xi ).

b) Is εi normally distributed?

c) Is εi homoskedastic?

d) Does Xi β̂OLS assume values only between 0 and 1?

Question 2

Suppose you have a sample of households and you are interested in determining the variables
which are relevant to the choice of buying a boat.

1
a) Which type of latent theoretical model can be considered? Which type of estimable model
should we consider?

b) Write down a linear latent theoretical model.

c) Write down the estimable model.

d) Are the marginal effects constant?

2
Applied Questions

Question 3

Consider a model where the dependent variable is a woman’s working choice


1

if the woman works
yi =
0

if the woman does not work

The estimated model is the following

yi = β0 + β1 agei + β2 educi + β3 childreni + εi

The summary statistics from the data, and the output from a logit model are reported below.

3
 a) Comment on the estimated parameters. Are they statistically significant?

b) What test would you use to evaluate whether the whole estimated model is statistically
significant?

Question 4

Consider the previous model, now estimated by a probit.

4
 a) What is the difference between a probit and a logit model?

b) Derive the marginal effect of education on the dependent variable.

c) Is the model overall significant?

Question 5

Now consider the marginal effects from the logit model estimated in question 3

a) Derive the marginal effect of education on the dependent variable in the logit case.

b) Can we give any direct interpretation to the estimated coefficients βj ? What is the value of
the estimated coefficient on the education variable?