Final Exam EC 351 December 11, 2012 1. Show that the conditional mean of Y given X depends on X but corr(X, Y ) = 0. Let X and Z be two independently distributed standard normal random variables, and let Y = X 2 + Z. (8 points) (a) Show that E(Y |X) = X 2 (b) Show that µY = 1. (c) Show that E(XY ) = 0. Hint: Use the fact that the odd moments of a standard normal random variables are all zero. (d) Show that cov(X, Y ) = 0 and thus corr(X, Y ) = 0.

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2. Let Y1 , ..., Yn be i.i.d. draws from a distribution with mean µ. A test of H0 : µ = 5 versus H1 : µ ≤ 5 using a t-statistic yields a p-value of .03. (a) Does the 95% confidence interval contains µ = 5? Explain. (4 points) (b) Can you determine if µ = 4 is contained the 95% confidence interval? Explain. (3 points)

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3. (a) A linear regression yields βˆ1 = 0. Show that R2 = 0. Hint: R2 = (corr(X, Y ))2 . (5 points) (b) A linear regression yields R2 = 0. Does this imply that βˆ1 ? Provide a brief proof.(3 points)

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4. A random sampling of workers contains nm = 120 and nw = 131 women. The sample average of men’s weekly earnings is Y¯m = $523.10, and the sample standard deviation sm = $68.10. The corresponding values for women are Y¯w = 485.10 and sw = $51.10. Let W omen denote a dummy variable that is equal to 1 for women and 0 for men and suppose that all 251 observations are used in the regression Yi = β0 + β1 Womeni + ui . Find the OLS estimates of β0 and β1 and their corresponding standard errors. (8 points)

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5. Evaluate the following statement: “In all of the regressions concern wage rates and gender, the coefficient on Female is negative, large, and statistically significant. The provides strong evidence of gender discrimination in the U.S. labor market.” (8 points)

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6. Consider the regression model Yi = β0 + β1 X1i + β2 X2i + ui . Transform the regression so that you can use a t-statistic to test: (a) β1 = β2 ; (3 points) (b) β1 + aβ2 = 0; (2 points) (c) β1 + β2 = 1. Hint: You must redefine the dependent variable in the regression. (2 points)

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7. Consider a linear, one independent variable, regression, but suppose that both Y and X are measured with error, and these errors are i.i.d. If we write the regression equation in terms of the imprecisely measured variables, will the slope coefficient be biased? Provide a proof. (8 points)

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8. The Malthusian growth model argues that the population growth rate increases in each period at a faster rate than the previous period. Which functional forms discussed during the semester can fit this type of nonlinear relationship given that X is time and Y is the population? Specify what signs you expect the coefficient(s) to have if economic theory is correct. When making a prediction about population for an early period in time (i.e., far left on the X axis), will the linear model make a prediction that is too small ( below Y) or too large (above Y)? (8 points)

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9. Interpret βˆ1 for the following regression models. Assume Xi is continuous and show your work. (9 points) (a) Yi = 1.2 + .59ln(Xi ) + ui (b) ln(Yi ) = 1.2 + .59Xi + ui (c) ln(Yi ) = 1.2 + .59ln(Xi ) + ui

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10. Assume Xi and Zi are continuous. Yi = 3.47 + .84Xi + .801Zi + .037Xi × Zi + ui . Show your work for all parts. (12 points) (a) What is ∆Yi /∆Xi when Zi = 0? (b) What is ∆Yi /∆Xi when Zi = 4? (c) What is ∆Yi /∆Zi when Xi = 0? (d) What is ∆Yi /∆Zi when Xi = 4?

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11. (Yi , X1i , X2i ) satisfies all of the assumptions needed for a multiple regression model. However, you are interested in β1 , the causal effect of X1 on Y . Suppose that X1 and X2 are uncorrelated. You estimate β1 by regressing Y onto X1 (so that X2 is not included in the regression). Does the estimator, β1 , suffer from omitted variable bias? Explain. (8 points)

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12. For Project Assignment 4, the vast majority of the class did not fully describe why or why not their regressions were externally valid. Many responses were similar to “Yes, my results do have external validity.” For this question, I would like a more complete response to the following question: In what situations do your results have external validity and why? A full credit response for this question will require more thought than a full credit response on Project Assignment 4. (8 points)

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Final Exam

Dec 11, 2012 - For Project Assignment 4, the vast majority of the class did not fully describe why or why not their ... credit response on Project Assignment 4.

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