School of Economics and Finance Štµepána Lazarová

Queen Mary University of London Semester A, 2023/24

ECN224 ECONOMETRICS 1
Exercise set 5 Week 6
1. The researcher estimates the following polynomial regressions relating av-
erage district income (Inc) to test scores (T estScore),

d
T estScore = 625:4 + 1:88 Inc; R2 = 0:506;
(1:9) (0:11)

d
T estScore = 607:3 + 3:85 Inc 0:042 Inc2 ; R2 = 0:554;
(2:9) (0:11) (0:0048)

d
T estScore = 600:1 + 5:02 Inc 0:096Inc2 + 0:00068Inc3 ;
(5:1) (0:71) (0:029) (0:00035)

R2 = 0:555;
d
T estScore = 577:3 + 9:88 Inc 0:43 Inc2 + 0:0098Inc3
(10:5) (2:09) (0:14) (0:0035)

0:000082Inc4 ; R2 = 0:559;
(0:000031)

where the numbers in parentheses are heteroskedasticity-robust stan-

dard errors of the estimated coe¢ cients. Which of the regressions
should the researcher select to model the relationship between income
and test scores?

2. Sales in a company are £ 196 million in 2003 and increase to £ 198 million
in 2004.

(a) Compute the percentage increase in sales using the usual formula
100 Sales2004 Sales2003
Sales2003
. Compare this value to the approximation
100 (ln (Sales2004 ) ln (Sales2003 )).
(b) Repeat part (a) assuming Sales2004 = 205; Sales2004 = 250;
Sales2004 = 500.
(c) How good is the approximation when the change is small? Does the
quality of the approximation deteriorate as the percentage change
increases?

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3. Suppose that a researcher collects data on houses that have sold in a
particular neighbourhood over the past year and obtains the regression
results in the table shown overleaf.

(a) Using the results in column (1), what is the expected change in
price of building a 500-square-foot addition to a house? Construct
a 95% con…dence interval for the percentage change in price.
(b) Comparing columns (1) and (2), is it better to use Size or ln (Size)
to explain house prices?
(c) Using column (2), what is the estimated e¤ect of pool on price?
(Make sure you get the units right.) Construct a 95% con…dence
interval for this e¤ect.
(d) The regression in column (3) adds the number of bedrooms to
the regression. How large is the estimated e¤ect of an additional
bedroom? Is the e¤ect statistically signi…cant? Why do you think
the estimated e¤ect is so small? (Hint: What other variables are
being held constant?)
(e) Is the quadratic term ln (Size)2 important?

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 Dependent variable: ln (P rice)

Regressor (1) (2) (3) (4)

Size 0.00042
(0.000038)
ln (Size) 0.69 0.68 0.57
(0.054) (0.087) (2.03)
ln (Size)2 0.0078
(0.14)
Bedrooms 0.0036
(0.037)
P ool 0.082 0.071 0.071 0.071
(0.032) (0.034) (0.034) (0.036)
V iew 0.037 0.027 0.026 0.027
(0.029) (0.028) (0.026) (0.029)
Condition 0.13 0.12 0.12 0.12
(0.045) (0.035) (0.035) (0.036)
Intercept 10.97 6.60 6.63 7.02
(0.069) (0.39) (0.53) (7.50)

Summary Statistics
SER 0.102 0.098 0.099 0.099
R2 0.72 0.74 0.73 0.73

Variable de…nitions: P rice = sale price (£ ’s); Size = house size (in square
feet); Bedrooms = number of bedrooms; P ool = binary variable (1 if house
has a swimming pool, 0 if not); V iew = binary variable (1 if house has a nice
view, 0 if not); Condition = binary variable (1 if realtor reports house is in
excellent condition, 0 if not).

4. (R) On QMplus, you will …nd a data …le CollegeDistance.csv that

contains data from a random sample of high school seniors interviewed
in 1980 and re-interviewed in 1986. In this exercise you will use these
data to investigate the relationship between the number of completed
years of education for young adults and the distance from each student’s
high school to the nearest four-year college. (Proximity to college lowers
the cost of education, so that students who live closer to a four-year
college should, on average, complete more years of higher education).

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A detailed description is given in CollegeDistance_Description.pdf
…le also available on QMplus.

(a) Run a regression of Ed on Dist, F emale, Bytest, T uition, Black,

Hispanic, Incomehi, Ownhome, DadColl, M omColl, Cue80,
and Stwmf g80. If Dist increases from 2 to 3 (that is, from 20
to 30 miles), how are years of education expected to change? If
Dist increases from 6 to 7 (from 60 to 70 miles), how are years of
education expected to change?
(b) Run a regression of ln (Ed) on Dist, F emale, Bytest, T uition,
Black, Hispanic, Incomehi, Ownhome, DadColl, M omColl, Cue80,
and Stwmf g80. If Dist increases from 2 to 3 (from 20 to 30 miles),
how are years of education expected to change? If Dist increases
from 6 to 7 (from 60 to 70 miles), how are years of education
expected to change?
(c) Run a regression of Ed on Dist, Dist2 , F emale, Bytest, T uition,
Black, Hispanic, Incomehi, Ownhome, DadColl, M omColl, Cue80,
and Stwmf g80. If Dist increases from 2 to 3 (from 20 to 30 miles),
how are years of education expected to change? If Dist increases
from 6 to 7 (from 60 to 70 miles), how are years of education
expected to change?
(d) Do you prefer the regression in (c) to the regression in (a)? Ex-
plain.