Lahore School of Economics

BSc ECONOMETRICS II
Spring 2013
Instructor: Dr. Azam Chaudhry
Problem set No.1-Proposed Solutions
Question 1:
Weights are calculated as: wi = Ni Pi / (1 Pi);
The regression results based on dropping the 12 observations are:

And those based on retaining the 12 observations after making the suggested adjustment are:

The difference between the two results is noticeable. Do not forget that the revised regression is
based on all the 40 observations whereas the original one was based on 28 observations only.
Notice the change in estimated t ratios. The revised model may be preferable as it includes all the
observations.
These data will yield a perfect fit since all values of X above 16 correspond to Y =1 and all values
of X below 16 correspond to Y =0. Therefore, an infinite number of curves would fit these data.
In situations like this the method of maximum likelihood may break down. Therefore, the ML
estimates given in the exercise are of questionable value.

Question 2:
a) The log of the odds in favor of higher murder rate is positively related to population size, the
population growth rate but negatively related to the reading quotient. The coefficient of 0.0014
attached to Pi is to be interpreted as follows:
Take its antilog, subtract one from it and multiply the result by 100. Thus antilog (0.0014) =
1.0014, subtracting 1 from this and multiplying the difference by 100, gives 0.14%. This means
that if population increases by one unit (i.e., by a thousand), the odds in favor of higher murder
rate goes up by 0.14%, keeping all other variables constant. Other coefficients are to be
interpreted in the same manner. For Ci its 5.77% and for Ri its 49.9%.
b) Individually, the coefficients of C & R are statistically significant at the 5% or better level. (z-stat
for C and R are 2.471 and 2.583 as compared to P which is 1.556 compared to z-critical of 1.96 at
5% significance level)
c) Following the steps in (a) above, the effect of a unit increase in the reading quotient is about
49.9% reduction in the odds ratio, ceteris paribus.
d) The odds ratio will go up by 5.77%.
Note: if you take the coefficients of the regressors at their face value, they will give the
approximate percent change in the odds ratio. But to be precise, you have to go through the steps
described in (a) above,

Question 3:
Start with
D
1D
[ ]=Z
ln
 Take the antilog, obtaining
D
=e Z
1D
Then cross-multiply and multiply out, which gives,
D=e D e Z
Z

Then solve for

eZ
D=
1+e Z

eZ 1
D=
Finally multiply the right hand side by eZ obtaining Z
(1+ e )

Question 4:
a) WN: The log of the odds that a woman has used a recognized form of birth control is 2.03 higher
if she wants no more children than it is if she wants more children, holding ME constant.
ME: a one unit increase in the number of methods of birth control known to a woman increases
the log of the odds that she has used a form of birth control by 1.45, holding WN constant.
LPM: If the model were a linear probability model, then each individual slope coefficient would
represent the impact of a one-unit increase in the independent variable on the probability that the
ith woman had ever used a recognized form of birth control, holding other independent variables
constant.
b) Yes, but we didnt expect BME to be more significant than BWN
c) B0 has no theoretical importance. Its fair to say, however, that in this particular case the two
positive variable-coefficient pairs make it very unlikely indeed that we would observe a positive
intercept.
d) We had add one of a number of potentially relevant variables, for instance the educational level of
the ith woman, whether or not the ith woman in a rural area etc.

Question 5:
a) Its reasonable conclude that if Di = 2, then the logit computer program will balk at taking the log
of a negative number (2). As mentioned in the text, however, logit programs iterate using
Equation 13.7 (or a version thereof), so its possible that a software package could produce some
sort of estimates. (Weve never seen one, however.)
b) With a linear probability model, the answer is unambiguous. The estimated coefficients of
WN and ME will double in size. If we divide each coefficient by two, the theoretical meanings
will be unchanged from the original model