Econ 3005 Homework #1 Solution

Spring, 2021

Part I: Exercises (You may use the distribution table when appropriate.)

1.1. Compute the following probabilities

(a) If Y is distributed (1,4) , find Pr( ≤ 3).

(b) If Y is distributed (3,9) , find Pr( > 0).

(c) If Y is distributed (50,25) , find Pr(40 ≤ ≤ 52).

(d) If Y is distributed (5,2) , find Pr(6 ≤ ≤ 8).

Y -mY
Answer: Using the fact that if Y N æçè mY , s Y2 ö÷ø then sY
~ N (0,1) and Appendix Table 1, we have

(a)
æ Y -1 3 -1 ö
Pr (Y £ 3) = Pr ç £ ÷ = F (1) = 0.8413.
è 2 2 ø
(b)
Pr(Y > 0) = 1 - Pr(Y £ 0)
æY -3 0 -3ö
= 1 - Pr ç £ = 1 - F(-1) = F(1) = 0.8413.
è 3 3 ÷ø
(c)
æ 40 - 50 Y - 50 52 - 50 ö
Pr (40 £ Y £ 52) = Pr ç £ £
è 5 5 5 ÷ø
= F (0.4) - F (-2) = F (0.4) - [1 - F (2)]
= 0.6554 - 1 + 0.9772 = 0.6326.
(d)
æ 6-5 Y -5 8-5ö
Pr (6 £ Y £ 8) = Pr ç £ £ ÷
è 2 2 2 ø
= F (2.1213) - F (0.7071)
= 0.9831 - 0.7602 = 0.2229.

1.2. Suppose , = 1,2, … , , . . . random variables, each distributed (10,4).

(a). Compute Pr(9.6 ≤ ≤ 10.4) when (i) n=20, (ii) n=100, and (iii) n=1,000

(b). Suppose c is a positive number. Show that Pr(10 − ≤ ≤ 10 + ) becomes close to 1.0 as n grows
large.

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 Answer:

(a)
æ 9.6 - 10 Y - 10 10.4 - 10 ö
Pr (9.6 £ Y £ 10.4) = Pr ç £ £ ÷
è 4/n 4/n 4/n ø
æ 9.6 - 10 10.4 - 10 ö
= Pr ç £Z£ ÷
è 4/n 4/n ø
where Z ~ N(0, 1). Thus,
æ 9.6 - 10 10.4 - 10 ö
(i) n = 20; Pr ç £Z£ ÷ = Pr (-0.89 £ Z £ 0.89) = 0.63
è 4/n 4/n ø

æ 9.6 - 10 10.4 - 10 ö
(ii) n = 100; Pr ç £Z£ ÷ = Pr(-2.00 £ Z £ 2.00) = 0.954
è 4/n 4/n ø

æ 9.6 - 10 10.4 - 10 ö
(iii) n = 1000; Pr ç £Z£ ÷ = Pr(-6.32 £ Z £ 6.32) = 1.000
è 4/n 4/n ø
(b)
æ -c Y - 10 c ö
Pr (10 - c £ Y £ 10 + c) = Pr ç £ £ ÷
è 4/n 4/n 4/n ø
æ -c c ö
= Pr ç £Z£ ÷.
è 4/n 4/n ø
c
As n get large 4/ n
gets large, and the probability converges to 1.

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 1.3 A survey of 1055 registered voters is conducted, and the voters are asked to choose between candidate
A and candidate B. Let p denote the fraction of voters in the population who prefer candidate A, and let ̂
denote the fraction of voters in the sample who prefer Candidate A. In the survey, ̂= 0.54.

(a). Test : = 0.5 . : ≠ 0.5 using a 5% significance level.

(b). Test : = 0.5 . : > 0.5 using a 5% significance level.

(c). Construct a 95% confidence interval for p.

(d). Construct a 99% confidence interval for p.

(e). construct a 50% confidence interval for p.

Answer:
0.54 - 0.5
(a) t = 0.54 ´ 0.46 /1055
= 2.61, Pr(|t| > 2.61) = .01, so that the null is rejected at the 5% level.
(b) Pr(t > 2.61) = .004, so that the null is rejected at the 5% level.
(c) 0.54 ± 1.96 0.54 ´ 0.46 /1055 = 0.54 ± 0.03, or 0.51 to 0.57.
(d) 0.54 ± 2.58 0.54 ´ 0.46 /1055 = 0.54 ± 0.04, or 0.50 to 0.58.
(e) 0.54 ± 0.67 0.54 ´ 0.46 /1055 = 0.54 ± 0.01, or 0.53 to 0.55.

1.4 To investigate possible gender discrimination in a firm, a sample of 100 men and 64 women with
similar job descriptions are selected at random. A summary of the resulting monthly salaries follows

Average Salary ( ) Standard Deviation ( ) n

Men $3100 $200 100
Women $2900 $320 64

What do these data suggest about wage differences in the firm? Do they represent statistically significant
evidence that average wages of men and women are different? (To answer this question, first state the
null and alternative hypothesis; second, compute the relevant t-statistic; third, compute the p-value
associated with the t-statistics; and finally, use the p-value to answer the question.)

Answer: Sample size for men n1 = 100, sample average Y 1 = 3100, sample standard deviation
s1 = 200. Sample size for women n2 = 64, sample average Y 2 = 2900, sample standard deviation
s12 s22
s2 = 320. The standard error of Y 1 - Y 2 is SE (Y 1 - Y 2) = + = 2002
+ 320 = 44.721. The
2

n1 n2 100 64

hypothesis test for the difference in mean monthly salaries is

H 0 : m1 - m 2 = 0 vs. H1 : m1 - m 2 ¹ 0.

The t-statistic for testing the null hypothesis is

t act = Y 1 - Y 2 = 3100 - 2900 = 4.4722.

SE(Y 1 - Y 2) 44.721

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 Use Equation (3.14) in the text to get the p-value:
p-value = 2F (-|t act |) = 2F (-4.4722) = 2 ´ (3.8744 ´ 10 -6 ) = 7.7488 ´ 10 -6.
The extremely low level of p-value implies that the difference in the monthly salaries for men and
women is statistically significant. We can reject the null hypothesis with a high degree of
confidence.

Part II: Empirical Exercise (Please download the corresponding data from Moodle and use R to
complete the part.)

2.1 World Bank Development Report Data

The point of this exercise is to help you understand the fact of poverty on the one hand, and
acquaint you with R on the other. You will need to download the data set (wbdr.dta); this
data set contains 1997 variables, unless otherwise noted). Here are some description of the
variables.
code : country code (alphabetical)
country : country name
illit_f : % illiterate, female aged 15+
illit_m: % illiterate, male aged 15+
illit_t : % illiterate, total aged 15+
mort_inf : infant mortality rate, per 1000
mort_5: < age 5 mortality rate, per 100
gnppc: GNP per capita (US$1995)
gnppcppp: GNP per capita (PPP)
mort77: 1977 infant mort rate, per 1000
gnppc77: 1977 GNP per capita (US$1995)
You may use appropriate table in answering the questions. Please hand in your R script file
with the problem set.
(a) What are the mean and standard deviation of GNP per capita (US$1995), illiteracy rate,
infant mortality rate and under 5 mortality rate in 1997 across countries?
Answer: The mean for GNP per capita, illiteracy rate, infant mortality rate and under 5 mortality
rate in 1997 are $5340.89, 20.95%, 41.17 per 1000, 62.49 per 100. The standard deviation of
them are $9307.99, 21.79%, 38.4 per 1000, 64.38 per 100.

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 b. Restrict your data set to countries for which we have GNP per capita for 1997. What are
the mean, minimum, and maximum illiteracy rate, infant mortality rate (for 1997), and
under 5 mortality rate among the 50 richest countries? Among the 50 poorest countries?
What does this tell you about the relationship between income and illiteracy, and income
and mortality
Answer:
For the 50 richest countries:

For the 50 poorest countries:

N.B. Be sure you have dropped observations for which 1997 GNP per capita was missing.
Also, the 50 richest countries aren't all rich countries; they include many "middle-income"
countries as well (e.g., the 50th richest country is Mexico, with GNP per capita of $3304).

Comparing these two sets of summary statistics, (1) we can conclude that on average,
across countries, higher income is associated with better social outcomes such as lower

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 illiteracy and lower infant and under 5 mortality (this comes from comparing the means);
(2) however, the minima and maxima tell us that there are some of the poorer countries
who do better in terms of the illiteracy and mortality indicators than some of the richer
countries. Thus, poverty is multidimensional (i.e., low income, low literacy, and high
infant mortality all tend to be associated with each other), but income doesn't tell the whole
story: among the poor countries, some do quite well along other dimensions. This may
reflect the fact that socioeconomic outcomes are a function not merely of the average level
of income in the country, but also of its distribution.

c. Now from part (a), find the median GNP per capita. How is different from the mean GNP
per capita？Why might the mean and median be different? What information can we
infer about the income distribution (inequality) from this?
Answer:
As (a) shows, the mean is much higher than the median for GNP per capita. The mean tells us
the average income. But if the right tail of the distribution of GNP is very long (one or two
countries are much richer than the others), the mean will be much higher than the median.
Similarly, if the left tail is very long, the mean could be lower than the median. It is therefore,
important to know both the median and mean when assessing income inequality. (You can use
the exact same logic in examining income inequality of individuals within one country.)

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