ECON318

Homework1 Solution

APPENDIX A
A.6 (i) The exact percentage by which Person Bs salary exceeds Person As is
100[42,000 35,000)/35,000] = 20%.
(ii) The approximate proportionate change is log(42,000) log(35,000) .182, so
the approximate percentage change is 18.2%. [Note: log() denotes the natural log.]
A.7 (i) When exper = 0, log(salary) = 10.6; therefore, salary = exp(10.6)
When exper = 5, salary = exp[10.6 + .027(5)] $45,935.80.

$40,134.84.

(ii) The approximate proportionate increase in salary when exper increases by five
years is .027(5) = .135, so the approximate percentage change is 13.5%.
(iii) 100[(45,935.80 40,134.84)/40,134.84)
increase is about one percentage point higher.

14.5%, so the exact percentage

A.9 (i) The relationship between yield and fertilizer is graphed below.

yield

122

121

120
0

50

100

fertilizer

(ii) Compared with a linear function, the function

yield = 120 + .19

fertilizer

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has a diminishing effect, and the slope approaches zero as fertilizer gets large. The initial
pound of fertilizer has the largest effect, and each additional pound has an effect smaller
than the previous pound.

APPENDIX B
B.2 (i) P(X 6) = P[(X 5)/2 (6 5)/2] = P(Z .5) .692, where Z denotes a
Normal(0,1) random variable. [We obtain P(Z .5) from Table G.1.]
(ii) P(X > 4) = P[(X 5)/2 > (4 5)/2] = P(Z > .5) = P(Z .5) .692.
(iii) P(|X 5| > 1) = P(X 5 > 1) + P(X 5 < 1) = P(X > 6) + P(X < 4) (1
.692) + (1 .692) = .616, where we have used answers from parts (i) and (ii).
B.5 (i) As stated in the hint, if X is the number of jurors convinced of Simpsons
innocence, then X ~ Binomial(12,.20). We want P(X 1) = 1 P(X = 0) = 1 (.8)12
.931.

(ii) Above, we computed P(X = 0) as about .069. We need P(X = 1), which we obtain
from (B.14) with n = 12, = .2, and x = 1: P(X = 1) = 12 (.2)(.8)11 .206. Therefore,
P(X 2) 1 (.069 + .206) = .725, so there is almost a three in four chance that the jury
had at least two members convinced of Simpsons innocence prior to the trial.
B.10 (i) E(GPA|SAT = 800) = .70 + .002(800) = 2.3. Similarly, E(GPA|SAT = 1,400) =
.70 + .002(1400) = 3.5. The difference in expected GPAs is substantial, but the
difference in SAT scores is also rather large.
(ii) Following the hint, we use the law of iterated expectations. Since E(GPA|SAT) =
.70 + .002 SAT, the (unconditional) expected value of GPA is .70 + .002 E(SAT) = .70 +
.002(1100) = 2.9.
(iii) If a students SAT score is 1,100, this does not mean he or she will have the GPA
2.9, found in part(ii). The GPA of 2.9 is the average GPA calculated when the average
SAT score is 1,100. GPA is influenced by other variables.

APPENDIX C
C.1 (i) This is just a special case of what we covered in the text, with n = 4: E( Y ) =
and Var( Y ) = 2/4.
(ii) E(W) = E(Y1)/8 + E(Y2)/8 + E(Y3)/4 + E(Y4)/2 = [(1/8) + (1/8) + (1/4) + (1/2)] =
(1 + 1 + 2 + 4)/8 = , which shows that W is unbiased. Because the Yi are independent,

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Var(W) = Var(Y1)/64 + Var(Y2)/64 + Var(Y3)/16 + Var(Y4)/4
= 2[(1/64) + (1/64) + (4/64) + (16/64)] = 2(22/64) = 2(11/32).
(iii) Because 11/32 > 8/32 = 1/4, Var(W) > Var( Y ) for any 2 > 0, so Y is preferred
to W when each is unbiased.
C.3 (i) E(W1) = [(n 1)/n]E( Y ) = [(n 1)/n], and so Bias(W1) = [(n 1)/n] = /n.
Similarly, E(W2) = E( Y )/2 = /2, and so Bias(W2) = /2 = /2. The bias in W1
tends to zero as n , while the bias in W2 is /2 for all n. This is an important
difference.
(ii) plim(W1) = plim[(n 1)/n] plim( Y ) = 1 = and plim(W2) = plim( Y )/2 =
/2. Because plim(W1) = and plim(W2) = /2, W1 is consistent whereas W2 is
inconsistent.
(iii) Var(W1) = [(n 1)/n]2Var( Y ) = [(n 1)2/n3]2 and Var(W2) = Var( Y )/4 =
2/(4n).
(iv) Because Y is unbiased, its mean squared error is simply its variance. On the
other hand, MSE(W1) = Var(W1) + [Bias(W1)]2 = [(n 1)2/n3]2 + 2/n2. When = 0,
MSE(W1) = Var(W1) = [(n 1)2/n3]2 < 2/n = Var( Y ) because (n 1)/n < 1. Therefore,
MSE(W1) is smaller than Var( Y ) for close to zero. For large n, the difference between
the two estimators is trivial.
C.6 (i) H0: = 0.
(ii) H1: < 0.
(iii) The standard error of y is s / n = 466.4/30 15.55. Therefore, the t statistic
for testing H0: = 0 is t = y /se( y ) = 32.8/15.55 2.11. We obtain the p-value as
P(Z 2.11), where Z ~ Normal(0,1). These probabilities are in Table G.1: p-value =
.0174. Because the p-value is below .05, we reject H0 against the one-sided alternative at
the 5% level. We do not reject at the 1% level because p-value = .0174 > .01.
(iv) The estimated reduction, about 33 ounces, does not seem large for an entire
years consumption. If the alcohol is beer, 33 ounces is less than three 12-ounce cans of
beer. Even if this is hard liquor, the reduction seems small. (On the other hand, when
aggregated across the entire population, alcohol distributors might not think the effect is
so small.)
(v) The implicit assumption is that other factors that affect liquor consumption such
as income, or changes in price due to transportation costs, are constant over the two
years.

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Homework1 Solution
C.9 (i) X is distributed as Binomial(200,.65), and so E(X) = 200(.65) = 130.
(ii) Var(X) = 200(.65)(1 .65) = 45.5, so sd(X)

6.75.

(iii) P(X 115) = P[(X 130)/6.75 (115 130)/6.75] P(Z 2.22), where Z is a
standard normal random variable. From Table G.1, P(Z 2.22) .013.
(iv) The evidence is pretty strong against the dictators claim. If 65% of the voting
population actually voted yes in the plebiscite, there is only about a 1.3% chance of
obtaining 115 or fewer voters out of 200 who voted yes.

CHAPTER 1
1.1 (i) Ideally, we could randomly assign students to classes of different sizes. That
is, each student is assigned a different class size without regard to any student
characteristics such as ability and family background. For reasons we will see in
Chapter 2, we would like substantial variation in class sizes (subject, of course, to
ethical considerations and resource constraints).
(ii) A negative correlation means that a larger class size is associated with lower
performance. We might find a negative correlation because a larger class size actually
hurts performance. However, with observational data, there are other reasons we might
find a negative relationship. For example, children from more affluent families might
be more likely to attend schools with smaller class sizes, and affluent children
generally might score better on standardized tests. Another possibility is that, within a
school, a principal might assign the better students to smaller classes. Or, some parents
might insist their children to be placed in smaller classes, and these same parents tend
to be more involved in their childrens education.
(iii) Given the potential for confounding factors some of which are listed in (ii)
finding a negative correlation would not be strong evidence that smaller class sizes
actually lead to better performance. Some way of controlling for the confounding
factors is needed, and this is the subject of multiple regression analysis.
C1.1 (i) The average of educ is about 12.6 years. There are two people reporting zero
years of education and 19 people reporting 18 years of education.
(ii) The average of wage in the sample is about $5.90, which seems low.
(iii) Using Table B-60 in the 2004 Economic Report of the President, the CPI
was 56.9 in 1976 and 233 in 2013.
(iv) To convert 1976 dollars into 2013 dollars, we use the ratio of the CPIs,
which is 233 / 56.9 4.09. Therefore, the average hourly wage in 2013
dollars is roughly 4.09($5.90) $24.13, which is a reasonable figure.

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(v) The sample contains 252 women (the number of observations with female =
1) and 274 men.
C1.3 (i) The largest is 100, the smallest is 0.
(ii) 289 out of 1,823, or about 15.85 percent of the sample.
(iii) 17
(iv) The average of math4 is about 71.9 and the average of read4 is about 60.1.
So, at least in 2001, the reading test was harder to pass.
(v) The sample correlation between math4 and read4 is about .843, which is a
very high degree of (linear) association. Not surprisingly, schools that have high
pass rates on one test have a strong tendency to have high pass rates on the other
test.
(vi) The average of exppp is about $5,194.87. The standard deviation is
$1,091.89, which shows rather wide variation in spending per pupil. [The minimum
is $1,206.88 and the maximum is $11,957.64.]
(vii) The percentage by which school A outspends school B is 100 (60005500)/5500 9.09%.
When we use the approximation based on the difference in the natural logs we get a
somewhat smaller number:
100 [log(6,000) log(5,500)] 8.71%.

CHAPTER 2
2.5 (i) The intercept implies that when inc = 0, cons is predicted to be negative $124.84.
This, of course, cannot be true, and reflects the fact that this consumption function might
be a poor predictor of consumption at very low-income levels. On the other hand, on an
annual basis, $124.84 is not so far from zero.
(ii) Just plug 30,000 into the equation: cons = 124.84 + .853(30,000) = 25,465.16
dollars.
(iii) The MPC and the APC are shown in the following graph. Even though the
intercept is negative, the smallest APC in the sample is positive. The graph starts at an
annual income level of $1,000 (in 1970 dollars).

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MPC
APC

.9

MPC
.853

APC

.728
.7
1000

10000

20000

30000

inc

2.6 (i) Yes. If living closer to an incinerator depresses housing prices, then being farther
away increases housing prices.
(ii) If the city chooses to locate the incinerator in an area away from more expensive
neighborhoods, then log(dist) is positively correlated with housing quality. This would
violate SLR.4, and OLS estimation is biased.
(iii) Size of the house, number of bathrooms, size of the lot, age of the home, and
quality of the neighborhood (including school quality), are just a handful of factors. As
mentioned in part (ii), these could certainly be correlated with dist [and log(dist)].
C2.6 (i) It seems plausible that another dollar of spending has a larger effect for lowspending schools than for high-spending schools. At low-spending schools, more money
can go toward purchasing more books, computers, and for hiring better qualified
teachers. At high levels of spending, we would expend little, if any, effect because the
high-spending schools already have high-quality teachers, nice facilities, plenty of books,
and so on.
(ii) If we take changes as usual, we obtain
math10 = 1 log(expend ) ( 1 /100)(%expend ),
just as in the second row of Table 2.3. So, if %expend = 10, math10 = 1 /10.
(iii) The regression results are

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Homework1 Solution

math10 = 69.34 + 11.16 log(expend )

n = 408, R 2 = .0297.
(iv) If expend increases by 10 percent, math10 increases by about 1.1 percentage
points. This is not a huge effect, but it is not trivial for low-spending schools, where a 10
percent increase in spending might be a fairly small dollar amount.
(v) In this data set, the largest value of math10 is 66.7, which is not especially close
to 100. In fact, the largest fitted values is only about 30.2.