1.Consider the following regression model: log(y)= 0+1x1+2x12+ 3x3+u.

This model will

suffer from functional form misspecification if _____.
a. 0 is omitted from the model
b. u is heteroskedastic
c. x12 is omitted from the model
d. x3 is a binary variable
Answer:c

2.A regression model suffers from functional form misspecification if _____.

a. a key variable is binary.
b. the dependent variable is binary.
c. an interaction term is omitted.
d. the coefficient of a key variable is zero.
Answer: c

3. Which of the following is true of Regression Specification Error Test (RESET)?

a. It tests if the functional form of a regression model is misspecified.
b. It detects the presence of dummy variables in a regression model.
c. It helps in the detection of heteroskedasticity when the functional form of the model is
correctly specified.
d. It helps in the detection of multicollinearity among the independent variables in a
regression model.
Answer:a

4. A proxy variable _____.

a. increases the error variance of a regression model
b. cannot contain binary information
c. is used when data on a key independent variable is unavailable
d. is detected by running the Davidson-MacKinnon test
Answer: c
5. Which of the following is a drawback of including proxy variables in a regression model?
a. It leads to misspecification analysis.
b. It reduces the error variance.
c. It increases the error variance.
d. It exacerbates multicollinearity.
Answer: d

6. The classical errors-in-variables (CEV) assumption is that _____.

a. the error term in a regression model is correlated with all observed explanatory variables
b. the error term in a regression model is uncorrelated with all observed explanatory variables

c. the measurement error is correlated with the unobserved explanatory variable

d. the measurement error is uncorrelated with the unobserved explanatory variable
Answer: d

7. Which of the following is true of measurement error?

a. If measurement error in a dependent variable has zero mean, the ordinary least squares
estimators for the intercept are biased and inconsistent.
b. If measurement error in an independent variable is uncorrelated with the variable, the
ordinary least squares estimators are unbiased.
c. If measurement error in an independent variable is uncorrelated with other independent
variables, all estimators are biased.
d. If measurement error in a dependent variable is correlated with the independent variables,
the ordinary least squares estimators are unbiased.
Answer: b

8. Which of the following is a difference between least absolute deviations (LAD) and
ordinary least squares (OLS) estimation?
a. OLS is more computationally intensive than LAD.
b. OLS is more sensitive to outlying observations than LAD.
c. OLS is justified for very large sample sizes while LAD is justified for smaller sample sizes.
d. OLS is designed to estimate the conditional median of the dependent variable while LAD
is designed to estimate the conditional mean.
Answer: b

9. The Least Absolute Deviations (LAD) estimators in a linear model minimize the sum of
squared residuals.
a. true
b. false
Answer: b

10.

Answer:
(i) For the CEV assumptions to hold, we must be able to write tvhours = tvhours* + e0,
where the measurement error e0 has zero mean and is uncorrelated with tvhours* and
each explanatory variable in the equation. (Note that for OLS to consistently estimate
the parameters we do not need e0 to be uncorrelated with tvhours*.)
(ii) The CEV assumptions are unlikely to hold in this example. For children who do not
watch TV at all, tvhours* = 0, and it is very likely that reported TV hours is zero. So if
tvhours* = 0 then e0 = 0 with high probability. If tvhours* > 0, the measurement error
can be positive or negative, but, since tvhours 0, e0 must satisfy e0 tvhours*. So e0
and tvhours* are likely to be correlated. As mentioned in part (i), because it is the
dependent variable that is measured with error, what is important is that e0 is
uncorrelated with the explanatory variables. But this is unlikely to be the case, because
tvhours* depends directly on the explanatory variables. Or, we might argue directly
that more highly educated parents tend to underreport how much television their
children watch, which means e0 and the education variables are negatively correlated.
11.

Answer:
(i) Eligibility for the federally funded school lunch program is very tightly linked to
being economically disadvantaged. Therefore, the percentage of students eligible for the
lunch program is very similar to the percentage of students living in poverty.
(ii) We can use our usual reasoning on omitting important variables from a regression
equation. The variables log(expend) and lnchprg are negatively correlated: school
districts with poorer children spend, on average, less on schools. Further, 3 < 0. From
Table 3.2, omitting lnchprg (the proxy for poverty) from the regression produces an
upward biased estimator of 1 [ignoring the presence of log(enroll) in the model]. So
when we control for the poverty rate, the effect of spending falls.
(iii) Once we control for lnchprg, the coefficient on log(enroll) becomes negative and has
a t of about 2.17, which is significant at the 5% level against a two-sided alternative.
The coefficient implies that math10 (1.26/100)(%enroll) = .0126(%enroll).
Therefore, a 10% increase in enrollment leads to a drop in math10 of .126 percentage
points.
(iv) Both math10 and lnchprg are percentages. Therefore, a ten percentage point
increase in lnchprg leads to about a 3.23 percentage point fall in math10, a sizeable
effect.
(v) In column (1) we are explaining very little of the variation in pass rates on the
MEAP math test: less than 3%. In column (2), we are explaining almost 19% (which
still leaves much variation unexplained). Clearly most of the variation in math10 is
explained by variation in lnchprg. This is a common finding in studies of school
performance: family income (or related factors, such as living in poverty) are much
more important in explaining student performance than are spending per student or
other school characteristics.