Tossa College of Economic Development

Master of Business Administration (MBA)

Basic Econometrics Assignment

Answer All of the Following Questions

1. Derive the coefficient of autocorrelation in Durbin-Watson test used to detect
autocorrelation problem which is one of the violation of the classical linear regression
assumption. Once the original model (first-order autoregressive equation) is transformed
to a new model (the transformed model), OLS can be applied to the transformed model to
obtain estimates of the original model from the estimates of the transformed model so that
OLS estimates become efficient and autocorrelation problem will be resolved. What is the
plausible justification that OLS estimates are efficient?
2. Suppose that the following regression result is estimated supply function from a sample of
12 observations.
Yi  49.669  2.158 X 1i  1.325 X 2i  3.124 X 3i
( 0.746) (0.12) (0.56) (0.72)
R 2  0.825
Where X1 is the price of the commodity, X2 is the income of the consumer, X3 is the
preference of the consumer and Y is quantity supplied. The standard errors are in
parenthesis
a) Test the statistical significance of price at 5% significance level using Standard
error technique
b) Establish 95% confidence interval for the coefficient of price of the commodity
c) Test the overall significance of the model at 1% level of significance
3. The economic theory of firm’s production states that assume a firm aims to generate
output, Q, using a given production function Q  16L2 , where L is input employed in the
production process. The input price and fixed cost are w and C0 respectively.
a) Drive and specify both the mathematical and econometric models of the firm’s cost
function based on the stated firm’s production theory.
b) Given the input price is 2 birr and fixed cost is 75 birr, derive the estimated
econometric model.
c) Predict the value of the total cost the firm should incur provided that the number of
input employed in the production process is 4.