Final Test ECON0080

Department of Economics
University College London

Autumn 2018

Instructions: This is a closed-book test consisting of three parts. The questions in

Part A, B and C amount to 30%, 40% and 30% of the total score, respectively. You
should answer all questions in the answer sheet. Total time allowed is TWO hours.
In case you need it, you can find a table detailing the cdf of the standard normal
distribution at the end of the exam paper.

1
Part A
Classify as True or False each of the following statements. You do not need to justify
your choice; explanations will be disregarded. When you’re not given a functional form or
they’re not specified otherwise, assume that functions are continuous and differentiable.

1. For small x and y, the linear approximation of x ln(1 + y) is x.

Rx Rx
2. 0 t2 et dt = x2 ex − 2 0 tet dt.
d
R x2
3. dx 2
f (y)dy = f (x2 ).

4. d
dt
= −20 at t = 0 if x(0) = 3, y(0) = 7, x0 (0) = −4, y 0 (0) = 6, fx (3, 7) =
f (x(t), y(t))
8, and fy (3, 7) = 2.

5. Consider the problem of maximising f (x, y) subject to h(x, y) = 0. Assume its La-
grangian function critical points are (x1 , y1 ), (x2 , y2 ). Then the maximum of f (x, y)
subject to h(x, y) = 0 must exist and it is max{f (x1 , y1 ), f (x2 , y2 )} .

6. If f (x, y) is a concave function and (x∗ , y ∗ ) is a critical point of f , then f (x∗ , y ∗ ) is

the global maximum.

7. A n × n square matrix is invertible if and only if the rank of this matrix is n.

8. The determinant of an upper triangular n × n matrix [aij ]1≤i,j≤n equals to a11 ×

a22 × · · · × ann .

9. Suppose two random variables X, Y satisfy E[Y |X] = 0. Then Cov(Y, X) = 0.

10. Consider two random variables Y, X with E[Y ] = 0, then

Z
V ar(Y |X = x) = y 2 fY |X (y|x)dy

11. Consider two random variables X, Y each taking values in {0, 1}. Suppose P (Y =
1|X = 1) = P (Y = 0) = P (X = 0) = 0.5, then P (X = 1|Y = 1) = 0.5.
√
12. Let Sn2 be the sample variance of i.i.d. random variables X1 , . . . , Xn . Then nSn is
p
a consistent estimator of the standard deviation of Xi , i.e. of V ar(Xi ).

2
13. Let X1 , . . . , Xn be i.i.d. random variables with E(Xi ) = 1 and E(Xi2 ) = 2. Denote
by X̄n = n1 ni=1 Xi the sample mean. Then
P

√
n(X̄n − 1) →d N (0, 2).

14. A 95% confidence interval for the mean is such that it contains the true mean with
probability 0.95.

15. Failing to reject a null hypothesis proves that the null hypothesis must be true.

3
Part B
Choose the correct answer to each of the following questions. You do not need to justify
your choice; explanations will be disregarded.

16. Consider the real-valued function f (x, y) = 3x2 + y 3 − 3xy. This function has

(a) one local minimum.

(b) one local maximum.
(c) one local maximum and one local minimum.
(d) two local minima.

17. Maximise xy subject to x4 + y 4 = 2. What is the maximum value?

√
(a) 2
(b) 1
1
(c) 2
3
(d) 2
   
1 2 3 1
18. How many solutions does the linear system Ax = b, A = 4 5 6, b = 2 have?
   

5 7 9 4

(a) no solution.
(b) an unique solution.
(c) infinite solutions.
(d) cannot conclude.

4
 " #
1 2
19. Which one of the following statements is Not true for this matrix A = ?
2 4

(a) It is diagonalisable.
(b) It has two distinct eigenvalues.
(c) Ax = 0 has an unique solution.
(d) It is positive semi-definite.

20. Suppose the two random variables X, ε are independent and ε ∼ N (0, 1). Let b be a
constant and denote by Φ(x) the standard normal cumulative distribution function.
Define a new random variable Y as taking the value 1 if bX + ε > 0 and the value
0 if bX + ε ≤ 0. What is the distribution of Y conditional on X?

(a) P (Y = 1|X = x) = Φ(−bx) and P (Y = 0|X = x) = 1 − Φ(−bx)

(b) P (Y = 1|X = x) = 1 − 12 Φ(bx) and P (Y = 0|X = x) = 21 Φ(bx)
(c) P (Y = 1|X = x) = 1 − Φ(−bx) and P (Y = 0|X = x) = Φ(−bx)
(d) neither of the above

21. Let Y, X, U be random variables such that Y = X + U , X and U take values in

{0, 1}, and X and U are independent. Suppose P (U = 1) = 31 . Then what is
E(Y |X = 1)?
1
(a) 12

(b) 1
7
(c) 12
4
(d) 3

5
22. Let X1 , . . . , Xn be i.i.d. random variables with mean zero and variance equal to 2.
Denote by X̄n = n1 ni=1 Xi the sample mean. Then, what is the limiting distribution
P
√
of n log(1 + X̄n )?

(a) N (0, 2)
(b) N (0, 1)
(c) N (1, 1)
(d) none of the above

23. Let X1 , . . . , Xn , W1 , . . . , Wn be i.i.d. random variables that are normally distributed

with mean zero and variance one. Let Yi = Xi + Wi , denote by X̄n , W̄n the sample
2 2
means of Xi ,Wi , and let SX,n , SW,n be the sample variances of Xi , Wi , respectively.
Which of the following is a valid 95% confidence interval for the mean of Yi ?
h i
SX,n +SW,n SX,n +SW,n
(a) X̄n + W̄n − 1.96 √
n
, X̄n + W̄n + 1.96 √
n
 √ 2 2
√ 2 2

SX,n +SW,n SX,n +SW,n
(b) X̄n + W̄n − 1.96 √
n
, X̄n + W̄n + 1.96 √
n

S 2 +S 2 S 2 +S 2
h i
(c) X̄n + W̄n − 1.96 X,n n W,n , X̄n + W̄n + 1.96 X,n n W,n
h i
S SX,n
(d) X̄n − 1.96 √X,n
n
, X̄ n + 1.96 √
n

6
Part C
Answer to all the questions.

24. Consider the problem

maximise xy subject to (x − 1)2 + (y − 1)2 ≤ 5.

(a) Suppose that (x∗ , y ∗ ) solves this problem. Is there necessarily a value of λ∗
such that (x∗ , y ∗ , λ∗ ) satisfies the Kuhn-Tucker conditions?
(b) Solve the above optimisation problem with one inequality constraint by using
Kuhn-Tucker condition.
(c) What happens if the constraints x ≥ 0 and y ≥ 0 are imposed?

25. Suppose a large mobile phone manufacturer claims their mobile phones, on average,
break and become unusable after three years of “normal usage”. We want to test
this hypothesis and buy n = 100 mobile phones from that manufacturer. We subject
each of the mobile phones to “normal usage” until they break down and denote the
age at breakdown in the variables X1 , . . . , Xn . We find an average age at breakdown
of 2.7 years, i.e.
n
1X
X̄n = Xi = 2.7,
n i=1
and a sample variance of
n
1 X
Sn2 = (Xi − X̄n )2 = 2.52 .
n − 1 i=1

Assume that X1 , . . . , Xn are i.i.d. random variables with mean µ which we don’t
know.

(a) Calculate a 95% confidence interval for the mean age at breakdown, µ.
(b) At the 95% confidence level and based on the sample we have collected, could
the mean age at breakdown, µ, be three years as claimed by the manufacturer?

7
(c) A friend claims that the mean age at breakdown is, in fact, only two years,
exactly the point in time when the warranty expires. To fail to reject your
friend’s hypothesis would the confidence level of the confidence set have to be
smaller or larger than 95%?

8
 Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990

Table 1: Standard normal distribution table. For example, go to row 0.4 and column 0.05 to find the
value 0.1736, which means that there is 0.45 probability mass between 0 and 0.1736.