Econometrics Quiz, 14.3.

2016

Time: 1.30 hours

There are three questions in all. Answer all of them. You are allowed to consult
your books. You are NOT allowed to consult or talk to one another.

1. Suppose height (denoted Y and measured in centimeters) and weight

(denoted X and measured in kilograms) are associated by the following relation

𝑌 = 𝛼 + 𝛾𝑋 + 𝜀
where 𝜀 is a random variable.

The data to estimate this relation comes from a sample of 833 college students in
the ages 18-21.

(a) What are the least squares estimates of the intercept and the slope?

(b) Show that the least squares residuals from this relation have zero mean and
are uncorrelated with the data values of X.

(c) How would the estimates change if the weight were measured in pounds
instead? (You may use the fact that 1 kilogram = 2.2 pounds)

(d) Is 𝛾̂ a random variable?

(e) What is the mean and variance of 𝛾̂? If you need to make some assumptions
to establish the properties, state them.

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2. An energy company hires you to investigate the impact of daily temperature

on daily electricity consumption among households in Delhi.

(a) In the framework of simple linear regression, write down a population model
of this relation. Clearly define the dependent variable and the independent
variable.

(b) How would you interpret the slope coefficient? Explain the conditions under
which a ceteris paribus assumption is valid.

(c) Can you name some variables that are part of the disturbance term?

(d) Given your answer in (c), would you think it is likely that the ceteris paribus
assumption is satisfied?

(e) After you estimated the model, a `wise’ expert asked you to regress log of
electricity consumption on log of daily temperature. Why do you think the
expert made such a suggestion?
(f) Another expert said that since your data included temperature and electricity
consumption for all months of the year, neither a linear model nor a model in
logs is correct. Instead, you should have a model where electricity consumption
depends on temperature and the square of temperature (e.g., 𝐸 = 𝑎 + 𝑏𝑡 + 𝑏𝑡 2 +
𝑢, where t is temperature and E is electricity consumption). Can you make any
sense of this suggestion?

(h) Suppose instead of including data from all months, you decided to use only
the daily temperature and energy consumption data for the month of May.
Explain why this is not a wise move.

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3. Consider the following

Population regression model: 𝑌 = 𝛽0 + 𝛽1 𝑋 + 𝑢
Sample regression model: 𝑌̂ = 𝛽̂0 + 𝛽̂1 𝑋

Let 𝑢̂ be the residual from the sample regression model.

With reference to above, evaluate whether the following statements are true or
false. Explain.

(i) ∑𝑛𝑖=1 𝑢̂𝑖 = 0 implies E (u) = 0

(ii) When least squares are used to compute the sample regression model, then it
2
must be that ∑𝑛𝑖=1 𝑢̂ = 0.
(iii) R2 is always between 0 and 1 no matter what values X and Y take in the data.
(iv) We have to assume E(u|X) = 0 in order to compute least squares estimates.
(v) The error term is homoscedastic if its variance is constant for all values of X.

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