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Tutorial 3 - Multiple Linear

This document contains four multiple linear regression models analyzed by Dr. Baljeet Singh: 1. A model of sleep as a function of work hours, education, and age, finding that increased work hours predicts decreased sleep. 2. A model of CEO salaries as a function of firm sales, return on equity, and stock returns, finding stock returns have a small but statistically significant effect on increasing salary. 3. A model of college GPA as a function of high school GPA, ACT score, and class skipping, finding high school GPA positively predicts college GPA. 4. A model of housing prices as a function of assessed value, lot size, square footage, and bedrooms,

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Gabriele Are
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37 views

Tutorial 3 - Multiple Linear

This document contains four multiple linear regression models analyzed by Dr. Baljeet Singh: 1. A model of sleep as a function of work hours, education, and age, finding that increased work hours predicts decreased sleep. 2. A model of CEO salaries as a function of firm sales, return on equity, and stock returns, finding stock returns have a small but statistically significant effect on increasing salary. 3. A model of college GPA as a function of high school GPA, ACT score, and class skipping, finding high school GPA positively predicts college GPA. 4. A model of housing prices as a function of assessed value, lot size, square footage, and bedrooms,

Uploaded by

Gabriele Are
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The University of the South Pacific EC303 Applied Econometrics

Dr Baljeet Singh Tutorial 2: Multiple Linear Regression

1. The following model is a simplified version of the multiple regression model used to study the
tradeoff between time spent sleeping and working and to look at other factors affecting sleep:
sleep=β 0 + β 1 totwrk + β 2 educ+ β 3 age+u
where sleep and totwrk (total work) are measured in minutes per week and educ and age are
measured in years.
1) If adults trade off sleep for work, what is the sign of β 1?
2) What signs do you think β 2 and β 3 will have?
3) Using given data, the estimated equation is
^
sleep=3638.25−0.148 totwrk−11.13 educ+ 2.20 age
2
n=706 , R =0.113
If someone works five more hours per week, by how many minutes is sleep predicted to
fall? Is this a large tradeoff?
4) Discuss the sign and magnitude of the estimated coefficient on educ.
5) Would you say totwrk, educ, and age explain much of the variation in sleep? What other
factors might affect the time spent sleeping? Are these likely to be correlated with totwrk?

2. Consider an equation to explain salaries of CEOs in terms of annual firm sales, return on
equity (roe, in percentage form), and return on the firm’s stock (ros, in percentage form):
log ⁡(salary )=β 0 + β 1 log ⁡(sales)+ β 2 roe+ β3 ros+u
1) In terms of the model parameters, state the null hypothesis that, after controlling for sales
and roe, ros has no effect on CEO salary. State the alternative that better stock market
performance increases a CEO’s salary.
2) Using given data, the following equation was obtained by OLS:
^
log ⁡( salary)=4.32+0.280 log ( sales )+ 0.0174 roe+0.00024 ros
se=( 0.32 )( 0.035 )( 0.0041 ) (0.00054 )
2
n=209 , R =0.283
By what percentage is salary predicted to increase if ros increases by 50 points? Does ros
have a practically large effect on salary?
3) Test the null hypothesis that ros has no effect on salary against the alternative that ros has
a positive effect. Carry out the test at the 10% significance level.
4) Would you include ros in a final model explaining CEO compensation in terms of firm
performance? Explain.

3. Consider the following estimated equation, which can be used to study the effects of skipping
class on college GPA:
^
colGPA =1.39+0.412 hsGPA +0.015 ACT −0 .083 skipped
se=( 0.33 ) ( 0.094 ) ( 0.11 ) (0.026)
2
n=141 , R =0.234
1) Using the standard normal approximation, find the 95% confidence interval for β hsGPA .

1
The University of the South Pacific EC303 Applied Econometrics
Dr Baljeet Singh Tutorial 2: Multiple Linear Regression

2
2) Can you reject the hypothesis H 0 : β hsGPA=0.4 against the two-sided alternative at the 5%
level?
3) Can you reject the hypothesis H 0 : β hsGPA=1 against the two-sided alternative at the 5%
level?

4. Consider the following equation to test the rationality of assessments of housing prices:
log ( price )=β 0 + β 1 log ( assess ) + β 2 log ( lotsize ) + β 3 log ( sqrft )+ β 4 bdrms+ u
where
price = house price
assess = the assessed housing value before the house is sold
lotsize = size of the lot, in feet
sqrft = square footage
bdrms = number of bedrooms.

1) In the simple regression model


log ( price )=β 0 + β 1 log ( assess ) +u,
the assessment is rational if β 1=1 and β 0=0 . The estimated equation is
^
log ⁡( price)=−14.47+0.976 log ⁡(assess)
se=( 16.27 ) ( 0.049 )
n=88 , RSS=165,644.51 , R 2=0.820
First, test the hypothesis that β 0=0 against the two-sided alternatives. Then test β 1=1 against
the two-sided alternative. What do you conclude?

2) To test the joint hypothesis that β 1=1 and β 0=0 , we need the RSS in the restricted model.
n
This amounts to computing ∑ ( pricei−assessi)2, where n=88, since the residuals in the
i=1

restricted model are just pricei−assessi.


(No estimation is needed for the restricted model because both parameters are specified
under H0.) This turns out to yield RSS = 209,448.99. Carry out the F test for the joint
hypothesis.

3) Now, test H 0 : β 2=0 , β3 =0 ,∧β 4 =0 in the model


log ( price )=β 0 + β 1 log ( assess ) + β 2 log ( lotsize ) + β 3 log ( sqrft )+ β 4 bdrms+ u
The R from estimating this model using the same 88 houses is 0.829.
2

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