Introductory Econometrics Internal Assessment-II

9th April 2024

MM 12
Note: Assignment given on April 8, 2024 at 9.30 am. To be submitted on April 9, 2024 in the class

1. Consider the following two models:

𝑙𝑛𝑌𝑖∗ = 𝛼1 + 𝛼2 𝑙𝑛𝑋𝑖∗ + 𝑢𝑖∗
𝑙𝑛𝑌𝑖 = 𝛽1 + 𝛽2 𝑙𝑛𝑋𝑖 + 𝑢𝑖
Where 𝑌𝑖∗ = 𝑤1 𝑌𝑖 and 𝑋𝑖∗ = 𝑤2 𝑋𝑖
(a) Establish the relationship between the two sets of regression coefficients and their standard
errors. (Note: to be done only for the coefficient of the variable. Not the intercept)
(b) Is 𝑅 2 different between the two models? Why?
(4 + 1 marks)

2. 𝐹𝑜𝑜𝑑 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 = 𝑓(𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒). This relationship is established using the

following two functional forms for 869 observations:
𝑴𝒐𝒅𝒆𝒍 𝑨: 𝐹𝑜𝑜𝑑 𝐸𝑥𝑝 = 0.9303 − 0.0777 ln(𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝) 𝑅 2 = 0.3508
𝑝 (0.00) (0.00) 𝐽𝐵 = 1.116 (𝑝 = 0.57)
1
𝑴𝒐𝒅𝒆𝒍 𝑩: 𝐹𝑜𝑜𝑑 𝐸𝑥𝑝 = 0.7726 + 1331.338 ( ) 𝑅 2 = 0.3332
𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝
𝑝 (0.00) (0.00) 𝐽𝐵 = 1.126 (𝑝 = 0.58)
(a) Interpret the regression coefficients of both models.
(b) Which model is a better model?
(c) Are the error terms normally distributed in both models?
(2 + 2 + 3 marks)