AE503 2013Fall

Problem Set 1
Chapter 4
3. (a) The coefficient 9.6 shows the marginal effect of Age on AWE; that is, AWE is
expected to increase by $9.6 for each additional year of age. 696.7 is the intercept
of the regression line. It determines the overall level of the line.
(b) SER is in the same units as the dependent variable (Y, or AWE in this example).
Thus SER is measures in dollars per week.
(c) R2 is unit free.
(d) (i) 696.7 9.6 25 $936.7;
(ii) 696.7 9.6 45 $1,128.7
(e) No. The oldest worker in the sample is 65 years old. 99 years is far outside the
range of the sample data.
(f) No. The distribution of earning is positively skewed and has kurtosis larger than
the normal.
(g) 0 Y 1 X so that Y 0 1 X Thus the sample mean of AWE is 696.7
9.6 41.6 $1,096.06.
4.

(a) (R Rf ) ( Rm R f ) u, so that
var (R Rf ) 2 var(Rm Rf ) var(u) 2 cov(u, Rm Rf ). But
cov(u, Rm R f ) 0, thus var(R Rf ) 2 var(Rm R f ) var(u). With > 1,

var(R Rf) > var(Rm Rf), follows because var(u) 0.

(b) Yes. Using the expression in (a)
var (R Rf ) var (Rm Rf ) ( 2 1) var (Rm Rf ) var(u), which will be positive

if var(u) (1 2 ) var (Rm R f ).

(c) Rm Rf 7.3% 3.5% 3.8%. Thus, the predicted returns are
R R f ( Rm R f ) 3.5% 3.8%

Kellog: 3.5%+(-0.03)*3.8%=3.386%
Waste Management: 3.5%+(0.7)*3.8%=6.16%
Sprint: 3.5%+(0.78)*3.8%=6.464%
Walmart: 3.5%+(0.65)*3.8%=5.97%
Barnes and Noble: 3.5%+(1.02)*3.8%=7.376%
Best Buy: 3.5%+(2.15)*3.8%=11.67%

AE503 2013Fall

Microsoft: 3.5%+(1.27)*3.8%=8.326%
6.

Using E(ui |Xi ) 0, we have

E(Yi |Xi ) E(0 1Xi ui |Xi ) 0 1E( Xi |Xi ) E(ui |Xi ) 0 1Xi
Empirical Exercise
3.

(a) Ed 13.96 0.073 Dist. The regression predicts that if colleges are built 10
miles closer
to where students go to high school, average years of college will increase by 0.073
years.
(b) Bobs predicted years of completed education 13.96 0.073 2 13.81
Bobs predicted years of completed education if he was 10 miles from college
13.96 0.073 1 13.89
(c) The regression R2 is 0.0074, so that distance explains only a very small fraction of
years of completed education.
(d) SER 1.8074 years.

Chapter5
3.

The 99% confidence interval is 1.5 {3.94 2.58 0.31) or 4.71 lbs WeightGain
7.11 lbs.

4.

(a) 3.13 1.47 16 $20.39 per hour

(b) The wage is expected to increase from $14.51 to $17.45 or by $2.94 per hour.
(c) The increase in wages for college education is 1 4. Thus, the counselors
assertion is that
2.50
14.71,
1 10/4 2.50. The t-statistic for this null hypothesis is t 1.470.07

which has a
p-value of 0.00. Thus, the counselors assertion can be rejected at the 1%
significance level. A 95% confidence for 1 4 is 4 (1.47 1.97 0.07) or $5.33
Gain $6.43.
Empirical Exercise
3.

(a) Ed 13.96 0.073 Dist

(0.04) (0.013)
The t-statistic is 0.073/0.013 5.46, which has a p-value of 0.000, so the null
hypothesis can be rejected at the 1% level (and thus, also at the 10% and 5%
levels).

AE503 2013Fall

(b) The 95% confidence interval is 0.073 1.96 0.013 or 0.100 to 0.047.
(c) Ed 13.94 0.064 Dist
(0.05) (0.018)
(d) Ed 13.98 0.084 Dist
(0.06) (0.013)
(e) The difference in the estimated 1 coefficients is 1, female 1,male 0.064
(0.084) 0.020. The standard error of for the estimated difference is
SE( 1, female 1,male ) (0.0182 0.0132)1/2 0.022, so that a 95% confidence
interval for the difference is 0.020 1.96 0.022 or 0.022 to 0.064. The
difference is not statistically different.