Introductory Econometrics

2023
1.. Stats whether the following statements are True or False, Give reasons for
answer.
(i) Consider s simple regression model estate using OLS. It is known that
the Explained sum of Squares is 75% higher than the residual Sum of
Squares. This implies that more than 75% of the total variation in the
dependent variable is explained by the variable in the explanatory
variable.

(ii) In a simple regression model estimated using OLS, the residuals (ei )
are such that e  0 and e 2  0.
(iii) The Ols estimate of slope coefficient of regression Y on X is same as
that of regression X on Y.

(iv) In a linear regression InYi  1  2 X i  ui the measure of goodness of fit

R 2 was estimated as 0.70. The p –value of the slope coefficient is
0.578. The coefficient is statistically significant since X explains 7% of
variation in Y.
(v) If X and Y are related to each other by the equation: Y = 2 + 0.5X, the
correlation coefficient between them is 0.5.

2. A researcher obtained the following results for determining the relation

between school dropout rates of a district(% of class V student who drop out
of school) in India and district’s per capita income, district’s expenditure on
education and a dummy variable D_partyABC=1 if political part ABC was in
power,=0 otherwise. 215 districts were included in the study

Ditrict’s
Model Intercept Per capita Expenditure D_paertABC
# Income(𝑋2 ) on (𝑋4 ) (𝑅2 ) TSS
education(𝑋3 )

1 1.422 -0.231 -0.379 0.002 0.9452

(0.876) (.058) (014) (.00001)
2 0.442 -0.115 0.8952
(.561) (.045) -

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 P values are reported in the parentheses
(i) What are a priori expected sign of the coefficient of district’s
expenditure on education and why? What is the p value of the
coefficient in model#1?
(ii) An opposition party XYZ claims that wherever party ABC comes to
power, school drop-out rates increase. Is this s valid claim?
(iii) Test the hypothesis 𝐻0 : 𝐵3=0 & 𝐵4=0?

(iv) Calculate R 2 for model #2. Will this be greater than the R 2 for
model#1 and why?
(v) To test for heteroscedasticity, the researcher conducted Glejser
test for model #1 and obtained the p value to 0.04. What can you
conclude about the absence of hetroscedasticity?
3. Suppose demand for Brazilian coffee in country Rico is a function of the
real price of Brazilian coffee (), real price of tea () and real disposable
income () in Rico. Suppose following results were obtained by running
the implied regression:
¼  9.1  7.8P  2.4 P  0.0035Y
coffee bc t d

t (0.5) (2.0) (3.5)

R 2  0.60 N  25
(i) Interpret the slope coefficient. Are the signs in accordance with
economic theory?
(ii) Do you think that the equation suffers from some problem? What
could be the nature of the problem?
(iii) What are in general the consequences of problem if any detected
in part(ii)?
(iv) Suppose the researcher drops Pbc and rum the following
regression
¼  9.3  2.6 P  0.0036Y
coffee t d

t (2.6) (4.0)
R 2  0.61 N  25

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 Has the researcher made the correct decision in dropping Pbc from the
equation Explain.
(v) Do you think that Brazilian coffee in Rico is price inelastic?
Why/why not?
4. An NGO has performed a regression analysis to determine whether
divorce rates affect suicide rate (𝑆𝑖 ) in a country. The NGO used data for
40 countries for year 2010 and obtained the following results using OLS
𝑆𝑖 = 22.33 – 0.0237HDI + 532.45InGDPper capita +0.0056 Divorce Rates
(0.0034) (-.019) (0.15) (.05)

Where 𝑆𝑖 is the number of suicides per million population in a country in

the year 2019
HDI is the Human development index ranging from 0 to 100
GDP per capita is gross domestic product per capita (in $)
Divorce Rates is number of divorces per million population in country in
the year 2019
(i) Why did not the NGO use only divorce rate as an explanatory
variable? What would be the properties of OLS estimator of the
coefficient of divorce rate in such a regression?
(ii) Given GDP has an exact relation with HDI where
1
HDI = (GDP per capita * Literacy Rates * Life Expectancy) , will perfect
3

multi-collinearity be a problem in the above regression?

(iii) Interpret the coefficient of In GDP per capita and Divorce rates.
(iv) Suppose NGO only examines the impact of divorce rates on
suicide rates and run the following regression
Si  1  2 DivorceRatesi   i . Show that  2 is an efficient estimator.

(v) The Ngo also ran a time series regression for one specific country
for a period of 35 years and obtained the following results.
Si  10.433  .047 HDIi  343.45 In GDP per capitai  .0002Divorce Ratesi

Durbin Watson d = 2.03

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 What can be inferred about the presence of AR(I from these
results?
5 Data is available on per unit cost(Y in Rs) of a manufacturing firm over a
20-year period and index of its output(X). Following results were
obtained;

Yµ
t  10.522  0.175 X t  0.000895 X t
2

t (14.3) ( 9.7) (7.8)

R 2  0.978 TSS  5700

(i) Interpret the sign of the two slope coefficients in the above regression.
(ii) At what level of output will the average cost function be minimum?
(iii) Compute adjusted R 2 .Is adjusted R 2 always less than R 2 ? Justify your
answer.
(iv) Test that the variance of per unit cost ( 2Y ) over this =20 year period
=20 against not equal to 20. Use 5% level of significance.
(v) Would your answer remain the same if a 95% confidence interval is
constructed to test the same hypothesis? Construct the interval and
justify your answer.
6 The amount of loan (𝐿𝑖 in lakhs) that is sanctioned by a bank to an
applicant is regresses on Gender (Dummy for Male: D Male =1 If male, 0
otherwise), Credit Score (Ci higher values indicate good credit history),
Income of (In𝑐𝑖 in lakh Rupees) and education level (E𝑑𝑖 in years) of the
applicant for a sample of 45 applicants
InLi  4.999  0.0038D _ Malei  0.043Ci  1.062 InInci  0.998Edi
R 2  0.6541

(i) What are the likely consequences on the results of the Gauss Markov
theorem if it is found that income and education have a high correlation
coefficient of 0.88?
(ii) Interpret the coefficient of D_Male.
(iii) Test for overall goodness of fit of this regression.

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(iv) The value of the test statistic of the White’s General test was found to
be 9.69. What is the distribution of this test statistic? What are the null
and alternative hypotheses of this test? What can you conclude about
the presence of heterosecdasticity based on above information given
squares and cross products of explanatory variables were included in the
auxiliary regression?
(v) What could be the possible remedy of the problem if heteroscedasticity
is indeed present? Assume that error variances are unknown.
7. A Real estate Company used housing data to estimate the effect that the
pandemic lockdown had on demand for sub-urban real estate.
¼  1.83  0.08D  0.91InX  0.55( D InX )
InYt t t t t

Where Y= share of sub-urban housing deals during a month, X= price per

square metre of sub-urban real estate, t = time,
𝐷𝑖 = 1, if t is a lockdown month
= 0, if t is not a lockdown month
All estimates are statistically significant at 5% level of significance.
(i) Write the regression functions for lockdown months and non-
lockdown months.
(ii) How would you test the hypothesis that lockdown had no impact
on price-elasticity for sub-urban housing?
(iii) Rewrite the regression result if dummy assignment it switched as
below:
𝐷𝑖 = 0, if t is a lockdown month
= 1, if t is not a lockdown month
(iv) Another investigator believes that the relationship between the
two variables X and Y is given by Yt  1  2 X t   t . Given a sample of n
observations, the investigator estimates 𝛽2 by calculating it as the
average value of Y divided by the average value of X. Discuss the
properties of this estimator. What difference would it make if it could be
assumed that 𝛽1 = 0?

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(V) What will be the consequence for the Gauss Markov theorem if there
are errors in measuring Y?

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