ECS3706/ASSIGNMENT 2/2024

Assignment 02 Semester 01

Econometrics
ECS3706

Semester 2

Department of Economics

This tutorial letter contains Assignment 2 Questions.

Answer ALL QUESTIONS

BARCODE
 CONTENTS
Page

QUESTION A1 (15 marks) ........................................................................................................................ 3

QUESTION A2 (15 marks) ........................................................................................................................ 3
QUESTION B1 (20 marks) ........................................................................................................................ 4

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 ECS3706 Assignment 02

QUESTION A1 (15 marks)

As an econometrician in the Department of Health (DoH), you are interested in modelling the
impacts of maternal smoking during pregnancy (MSDP) on infant birth weight (BW). MSDP is
measured by the average number of cigarettes the mother smoked per day during pregnancy.
BW is infant birthweight in kilograms. You estimate the following model.
̂ = 3.5 − 0.625𝑀𝑆𝐷𝑃
𝐵𝑊 (Equation 1)
(a) What is the predicted birth weight when MSDP=0? (2)
(b) What is the predicted birth weight when MSDP = 15? (2)
(c) Comment on the difference between your answers to part (a) and part (b) (2)
(d) Do your results imply causality between BW and MSDP? Explain. (3)
(e) Discuss three possible explanatory variables that could be added to this model.
Hypothesise about the expected signs for these variables. (6)

[15]
QUESTION A2 (15 marks)
An econometrician in the Property Practitioners Regulatory Authority is interested in investigating
the impact of school quality on house prices. She estimates the following model.
̂𝑖 = 𝛽̂0 + 𝛽̂1 𝐵𝐸𝐷𝑖 + 𝛽̂2 𝐵𝐴𝑇𝐻𝑖 + 𝛽̂3 𝑅𝐸𝐺𝑖 + 𝛽̂4 𝐸𝑅𝐹𝑖 + 𝛽̂5 𝑆𝑄𝑖 + 𝛽̂5 𝐸𝑅𝐹𝑖2
𝑆𝑃 (Equation 2)

The Dependent Variable is the Selling Price (SP) of the property.

Variables Coefficient Standard Error

Number of Bedrooms (BED) 0.079 0.006

Number of Bathrooms (BATH) 0.046 0.0042

Year of property registration -1.236 2.462

(REG)

School Quality (SQ) 0.029 0.0024

Erf (Plot) size (ERF) 0.014 0.0015

Erf Size squared (ERF2) -0.003 0.024

Adjusted R2 =0.7681
N = 2600

Perform all statistical tests at the 5% significance level (unless stated otherwise).
(a) Hypothesise signs and state the appropriate null and alternative hypotheses for the
coefficients based on theoretical considerations (provide reasons for your choice). (5)

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(b) Test the individual coefficients for statistical significance. Please present your
answers in table format (5)
(c) Interpret the coefficient of SQ and ERF2 (3)
(d) What are the possible indicators of School Quality (SQ) in this model? (2)

[15]

QUESTION B1 (20 marks)

Worried about the rise of military expenditure globally, you estimate a model to investigate the
impact of military spending on investment. You obtain the following results:

The dependent variable is Investment.

Variable Co-efficient

Military Spending (MLS) -0.341

Real Interest Rate (RINT) 0.062

Gross National Income (GNI) 0.216

Domestic Credit to the Private Sector (DCPS) -0.026

N=40
Adjusted R2 =0.722
F-Statistic = 13.828
Durbin – Watson stat. = 2.481

a) What is the impact of military spending on investment? (2)

b) Are there any omitted variables in this model? If so, what are the consequences? (2)
c) Perform the F-Test for the joint significance of coefficients in this model. (4)
d) Test for the presence of serial correlation in this model. (5)
To test for heteroscedasticity using the White test, an auxiliary equation is estimated as follows:

𝑒𝑖2 = −12.37 + 0.2620𝑋1𝑖 − 3.453𝑋2𝑖 + 0.0354𝑋1𝑖

2 2
+ 0.1217𝑋2𝑖 − 0.0027𝑋1𝑖 𝑋2𝑖 (Equation 3)

(-0.02) (0.50) (-0.16) (0.65) (0.43) (-0.63)

N=40
R2= 0.34

e) Does the model suffer from heteroscedasticity? Explain. (4)

f) Is the auxiliary equation correctly specified? Explain. (3)