1) Consider the multiple regression model

= 1 1 + 2 2 + 3 3 +

With the nine observations on , 1 , 2 and 3 in the table below.

1 2 3
1 1 0 1
2 1 1 -2
3 1 2 1
-1 1 -2 0
0 1 1 -1
-1 1 -2 -1
2 1 0 1
1 1 -1 1
2 1 1 0
Use a hand calculator to answer the following questions
i) Calculate the observations in terms of deviations from their means. That is, find

2 = 2
2 , 3 3 =
= 3 , 4 Marks

ii) Calculate 2
2
, 2 , 3

, 2 2
3 , and 3 10Marks

iii) Find the least squares estimates b1, b2 and b3 6 Marks

2) You obtained the following results from a linear regression based on a state-level data, a total
of N = 52 observations.
a) The estimated variance 2 = 2.04672. What is the sum of the squared least squares residuals?

7 Marks

b) The estimated variance of b2 is 0.00088. What is the value of ( ) 2 ? 3 Marks

c) Suppose the dependant variable yi = states mean income (in thousands of dollars) of males
who are 18 years of age or older and = the percentage of males 18 years or older who are high
school graduates. If b2 = 0.15, interpret this result.
Suppose = 68.143 and = 14.071. What is the estimate of the intercept parameter? 10 Marks

3a) An aluminum manufacturing firms marketing manager believes that total sales x can be
modeled using a normal distribution with mean = $2.5 million and standard deviation
= $300,000. What is the probability that the firms sales will exceed $3 million? Draw a sketch
to illustrate your calculation.
5 Marks
b) Let x1 = 7, x2 = 2, x3 = 4, x4 = -7, y1 = 5, y2 = 2, y3 = 3, y4 = 12
Calculate

)
=1

) = /4
=1

[Note: is called the arithmetic average or arithmetic mean]

4

) ( )
=1

4 4

) ( )( ) = /4
=1 =1

4 4

) ( ) 4 / 2 4 2
=1 =1

5 Marks

c) State and interpret the main assumptions under which the Gauss Markov theorem holds for
time series regression applications.
10 Marks

4a) Assess whether the statements in (i) (iii) are true or false, and explain why.
i) One of the assumptions that needs to hold for the process (yt) to be weakly stationary
is that Cov (yt, yt - k) is constant over time and depends on both t and k
ii) A white noise process is a non-stationary process for which all auto correlations are
equal to zero.
iii) If our series are non-stationary, it is safe to use OLS as our estimation methods.
3 Marks
b) Why is serial correlation often present in time series data? 5 Marks
c) Why is the presence of serial correlation in the residual a problem? Please provide a detailed
answer. 6 Marks
d) State the null hypothesis for testing serial correlation in the equation below.
Ut = PUt-1 + et 2 Marks
e) The residual Ut is usually unobserved. How would you estimate it? 4 Marks
5a) Louisiana State University wish to estimate how much enrolment will fall if tuition is raised
by $300 per semester, and thus its revenue from tuition will rise or fall. As a professional,
how would you advice Louisiana State University in carrying out the propose research to
estimate enrolment and tuition revenue. 10 Marks

b) Explain how Economists and other Social Scientist generate data for statistical inference.
5 Marks
c) Outline the format for writing a research report.
5 Marks