ECONOMETRICS

TUTORIAL 4 SOLUTIONS

Fall session
 EXERCISE 1

1) 𝛽መ1 and 𝛽መ2 have elasticity interpretations. For example, for India a 1% increase in
per capita real GDP will lead to a 1.006% increase in per-capita energy demand. A 1%
increase in real energy price will lead to a 0.068% decrease in per-capita energy
demand.

2) For Korea:
RSS
We know that ˆ 2
so, RSS  ˆ u2   n  k 
nk
u

 0.031  17  3
²

 0.0134

2
 RSS RSS
We know that R 2  1  so, TSS 
TSS 1  R2
0.0134

1  0.54
 0.0291

ESS  TSS  RSS

 0.0291  0.0134
 0.0157

3
3) For Indonesa

H 0 :  2  0 H 0 : 3  0
 
H1 :  2  0 H1 :  3  0
ttab  t0.025,14  2.145 ttab  t0.025,14  2.145

ˆ2 1.564 ˆ3 0.488

tcal    6.684 tcal    2.5
 
se ˆ2 0.234  
se ˆ3 0.195

tcal >ttab  Reject H 0 tcal >ttab  Reject H 0

4
EXERCISE 2

Yi  1   2 I i   3 Si  U i

 0.2782 0.00409 0.03859    yi   5475 

    
 X T Y     yi Ii   195375 
1
X T
X  0.00409 0.0002918 0.001955 
 0.03859 0.001955 0.04139    y S   15670 
   i i  
1)

   X X   X TY 
1
ˆ T

 0.2782 0.00409 0.03859   5475  119.356 

    
  0.00409 0.0002918 0.001955  195375    3.982 
 0.03859 0.001955 0.04139   15670   55.343 
    
5
 Yˆi  119.356  3.982 I i  55.343Si

1)

ˆ1  119.356  If the annual family income and the number of family mumbers
were 0 then, the annual expenditure on fixed telephone by
a family is 119.356 Euros.

ˆ2  3.982  If the annual family income increases by one thousand Euro then,
the annual expenditure on fixed telephone by a family increases
by 3.982 Euros.

ˆ3  55.343  If the number of family members increases by one person,

the annual expenditure on fixed telephone increases by 55.343 Euros.
6
 2) First method Second method
ESS
R 
2
R  1
2 RSS
TSS
TSS
ESS  ˆ T  X T Y   ny 2
 5475  2 RSS   yi2  ˆ T  X T Y 
   5475 
ESS  119.356 3.982 55.343  195375   15   
 15670   15   2340325  2298682.16  41642.84
 
 2298682.16 -1998375 = 300307.16
41642.84
TSS   y ny R  1  0.8782
2 2 2
i
341950
 2340325  15  3652
 341950
300307.16
R2   0.8782
341950
87.82% of the variation of annual expenditure on fixed telephone by a family
7
is explained by the regression.
 RSS 41642.84
3) ˆ 
2
  3470.24
nk 15  3
u

 
var   ˆ u  X X 
1
4) ˆ 2 T

 0.2782 0.00409 0.03859 

 
 3470.24  0.00409 0.0002918 0.001955 
 0.03859 0.001955 0.04139 

 965.42 14.19 133.92 
 
  14.19 1.013 6.78 
 133.92 6.78 143.63 


8
 H 0 :  2  0
5) 
H1 :  2  0
ttab  t0.025,12  2.179

ˆ2 3.982
tcal    3.96
 
se ˆ2 1.013

tcal >ttab  Reject H 0 , annual family income is significant at 5% level.

H 0 : 3  0

H1 :  3  0
ttab  t0.025,12  2.179

ˆ3 55.343
tcal    4.62
 
se ˆ3 143.63

tcal >ttab  Reject H 0 , the number of family members is significant at 5% level.

9
  H 0 :  2  3  0
6) 
 H1 :  2  0 and/or 3  0
R2 / k 1 0.8782 / 2
Fcal    43.26
1  R  / n  k 1  0.8782  /12
2

Ftable  Fk 1,n  k  F2,12  3.89

Fcal >Ftable
 Reject H 0 , the model is globally significant at 5% level.

10
 H 0 :  2  3 H 0 :  2  3  0
7)  
H1 :  2   3 H1 :  2  3  0
ttab  t0.025,12  2.179

ˆ2  ˆ3 ˆ2  ˆ3

tcal  

se ˆ2  ˆ3   
ˆ ˆ2  var
var  
ˆ ˆ3  2cov 
ˆ ˆ2 , ˆ3 
3.982  55.343

1.013  143.63   2  6.78 
 4.08
tcal >ttab  Reject H 0 .

11
 H 0 :  3  10  2 H 0 :  3  10  2  0
8)  
H1 :  3  10  2 H1 :  3  10  2  0
ttab  t0.025,12  2.179

ˆ3  10 ˆ2 ˆ3  10 ˆ2

tcal  

se ˆ3  10 ˆ2   
ˆ ˆ3  var
var  
ˆ 10 ˆ2  2cov 
ˆ 10 ˆ3 , ˆ2 
55.343  10  3.982

143.63  100 1.013   20  6.78 
 0.796
tcal <ttab  Fail to reject H 0 .

12
 Yˆi  110.372  4.095I i  46.642Si  17.36M i ; R 2  0.883
( t value ) (2.95) (3.52) (2.41) (0.4)

H 0 :  4  0
9) 
H1 :  4  0
ttab  t0.025,11  2.201
tcal  0.4
tcal <ttab  Fail to reject H 0 .

We calculate the adjusted R squared for each model:

 n 1   14 
R1  1  1  R 2     1   1  0.8782    0.8579

 nk  12 
 n 1   14 
R 2  1  1  R 2     1    1  0.883     0.8510
 nk  11 
 We choose the first model with the highest R 2 . 13
 EXERCISE 3
ct  1   2 pt  3 rt  ut

c
1) 2   0 ; if the price , the consumption
p

r
2   0 ; if the revenue , the consumption
p

RSS   ct2  ˆ T  X T C 
24

t 1
 0.06 0.03 0.06   25   1.02 
   X X    X T C    0.03 0.2     
1
ˆ T
0    2    0.35 
 0.06 0.35   7   0.95 
 0
 25 
 
 33.34  1.02 0.35 0.95   2   33.34  31.45  1.89
7
1.89  
So,ˆ 
2
=0.09 14
21
  
ˆ ˆ  ˆ u2  X T X 
1
3) Var
 0.06 0.03 0.06   0.0054 0.0027 0.0054 
   
 0.09   0.03 0.2 0    0.0027 0.018 0 
 0.06    
 0 0.35   0.0054 0 0.0315 

 
se ˆ2  var  
ˆ  0.018   0.134
ˆ ˆ2  var

se  ˆ  
3
ˆ  ˆ  
var 3
ˆ  0.0315   0.177
var

H 0 : 2  0
4) i) 
 H1 :  2  0
ttab  t0.025,21  2.08

ˆ2 0.35
tcal    2.61
 
se ˆ2 0.134

tcal  ttab  Reject H 0 , the price is significant at 5% level. 15

  H 0 : 3  0
ii) 
 H1 :  3  0
ttab  t0.025,21  2.08

ˆ3 0.95
tcal    5.37
 
se ˆ3 0.177

tcal  ttab  Reject H 0 , the income is significant at 5% level.

 H 0 :  2  3  0
iii) 
 H1 :  2  0 and/or3  0
 25  2
   
ESS  ˆ T  X T C   Tc 2  1.02 0.35 0.95   2   24     5.4
25
7  24 
 
5.4 / 2
Fcal   30
1.89 / 21
Ftab  F2,21  3.47
Fcal  Ftab  Reject H 0 , the revenue and the price affect both the consumption. 16
  H 0 : 3  1
iv) 
 H1 :  3  1
ttab  t0.025,21  2.08

ˆ3  1 0.95  1
tcal    0.28
 
se ˆ3 0.177

tcal  ttab  Fail to reject H 0 .

17
 EXERCISE 4

The production function:

1) log  PROD   1   2 log  AREA    3 log  LAB    4 log  FERT   u

The fitted regression equation is:

logˆ  PROD  =-1.548+0.3617log(AREA)+0.4328 log (LAB)+0.2095 log (FERT)

All estimates have elasticity interpretations. For example, a 1% increase in labor

will lead to a 0.4328% increase in rice output. A 1% increase in fertilizer will lead to a
0.2095% increase in rice output.
All p-values are less than 0.005 implying all coefficients are significantly different from
zero at 5% significance level.
18
  
2) CI     ˆ  t
4  4 
 2
,n k
 
ˆ
 se  4 

  0.2095  1.96  0.0383
  0.1344, 0.2846

 H 0 :  2  0.5  H 0 :  2  0.5  0
3)  
 H1 :  2  0.5  H1 :  2  0.5  0

ttab  t0.025,100  1.96

ˆ2  0.5 0.3617  0.5

tcal    2.16
 
se ˆ2 0.0640

tcal >ttab  Reject H 0 .

19
 H :  2  3
4)  0  H 0 :  2  3  0
 
 H1 :  2   3  H1 :  2   3  0
The test can be performed with an F statistic or a t-statistic.
ttab  1.96

ˆ2  ˆ3 ˆ2  ˆ3 0.36174  0.43285

tcal     0.585

se ˆ2  ˆ3  
ˆ ˆ2  ˆ3
var  0.0148

tcal  ttab  Fail to reject H 0 .

Using the F statistic we have:

Fcal  0.342 that is

 RSSR  RSSU  / m
 0.342
RSSU / n  k
Ftab  F1,100  3.94
Fcal  Ftab  Fail to reject H 0 . 20
5)  H 0 :  2   3   4  1   H 0 :  2   3   4  1  0
 
 H1 :  2   3   4  1  H1 :  2   3   4  1  0
ttab  1.96

ˆ2  ˆ3  ˆ4  1 ˆ2  ˆ3  ˆ4  1 0.3617  0.4328  0.2095  1

tcal     0.168

se ˆ2  ˆ3  ˆ4  
ˆ ˆ2  ˆ3  ˆ4
var  0.00057

tcal  ttab  Fail to reject H 0 .

Using the F statistic we have:

Fcal  0.0295
Ftab  F1,100  3.94
Fcal  Ftab  Fail to reject H 0 .

21
  H 0 :  2   3  0 and  2   3   4 =1
6) 
 H1 :  2   3  0 and/ or  2   3   4  1

Fcal 
 RSSR  RSSU  / m  RSSR  RSSU  / 2

RSSU / n  k RSSU /100
Ftab  F2,100  3.09
If Fcal  Ftab  Reject H 0 .

22
 EXERCISE 5

MAˆi  8.5  0.3 NFi  NSi  0.5 NTi  1.2Gi ; RSS  0.89
(4.5) (7.1) (2.6) (1.9) (0.3)

H 0 :   0
1) 
H1 :   0
ttab  t0.025,25  2.06
1.2
tcal  4
0.3
tcal  ttab  Reject H 0 .

2)  is the average difference in average obtained in master between men and women.

23
3) MAi  1   2 NFi   3 NSi   4 NTi   Gi  ui (1)
MAi  1  NFi  NSi  0.2 NTi  ui (2)

There are four restrictions

  1, 3  1,  4  0.2 and   0
2

H 0 :  2  1 and  3  1 and  4  0.2 and   0


H1 :  2  1 and/or  3  1 and/or  4  0.2 and/or   0

Fcal 
 RSSR  RSSU  / m  3.8  0.89  / 4
  20.43
RSSU / n  k 0.89 / 25
Ftab  F4,25  2.76
Fcal  Ftab  Reject H 0 , we reject the restricted model.

24