Ejercicios de Econometria

For Students
Solutions to OddNumbered EndofChapter Exercises

Chapter 2
Review of Probability
2.1. (a) Probability distribution function for Y
Outcome (number of heads) Y  0 Y  1 Y  2

Probability 0.25 0.50 0.25
(b) Cumulative probability distribution function for Y
Outcome (number of heads) Y  0 0  Y  1 1  Y  2 Y  2

Probability 0 0.25 0.75 1.0
d
(c) mY = E (Y )  (0 �0.25) + (1 �0.50) + (2 �0.25)  1.00 . F � Fq, �.
Using Key Concept 2.3: var(Y )  E (Y ) - [ E (Y )] ,
2 2
and
(ui | X i )
so that
var(Y )  E (Y 2 ) - [ E (Y )]2  1.50 - (1.00) 2  0.50.
2.3. For the two new random variables W  3 + 6 X and V  20 - 7Y , we have:

E (V )  E (20 - 7Y )  20 - 7 E (Y )  20 - 7 �0.78  14.54,
(a) E (W )  E (3 + 6 X )  3 + 6 E ( X )  3 + 6 �0.70  7.2.
s W2  var (3 + 6 X )  6 2 �
s X2  36 �0.21  7.56,
(b) s V  var (20 - 7Y )  ( -7) �s Y2  49 �0.1716  8.4084.

2 2
(c) s WV  cov (3 + 6 X , 20 - 7Y )  6 �(-7) cov (X , Y )  -42 �0.084  -3.528

s -3.528
corr (W , V )  WV   -0.4425.
sWsV 7.56 �8.4084
©2011 Pearson Education, Inc. Publishing as Addison Wesley
Solutions to OddNumbered EndofChapter Exercises 3
2.5. Let X denote temperature in F and Y denote temperature in C. Recall that Y  0 when X  32 and
Y 100 when X  212; this implies Y  (100/180) �( X - 32) or Y  -17.78 + (5/9) �X. Using Key
Concept 2.3, mX  70oF implies that mY  -17.78 + (5/9) �70  21.11�
C, and s  7oF implies
X
s Y  (5/9) �7  3.89�
C.
Using obvious notation, C  M + F ; thus mC  mM + m F and s C  s M + s F + 2cov( M , F ). This

2 2 2
2.7.
implies
(a) mC  40 + 45  $85, 000 per year.
cov( M , F )
corr (M , F ) 
(b) , so that cov ( M , F )  s M s F corr ( M , F ). Thus cov ( M , F ) 
s Ms F
12 �18 �0.80  172.80, where the units are squared thousands of dollars per year.
(c) s C  s M + s F + 2cov( M , F ), so that s C  12 + 18 + 2 �172.80  813.60, and

2 2 2 2 2 2
s C  813.60  28.524 thousand dollars per year.

(d) First you need to look up the current Euro/dollar exchange rate in the Wall Street Journal, the
Federal Reserve web page, or other financial data outlet. Suppose that this exchange rate is e
(say e  0.80 Euros per dollar); each 1 dollar is therefore with e Euros. The mean is therefore
e  mC (in units of thousands of Euros per year), and the standard deviation is e  sC (in units
of thousands of Euros per year). The correlation is unitfree, and is unchanged.
Value of Y Probability
Distribution of
14 22 30 40 65 X
Value of X 1 0.02 0.05 0.10 0.03 0.01 0.21
5 0.17 0.15 0.05 0.02 0.01 0.40
8 0.02 0.03 0.15 0.10 0.09 0.39
Probability distribution of Y 0.21 0.23 0.30 0.15 0.11 1.00
(a) The probability distribution is given in the table above.
E (Y )  14 �0.21 + 22 �0.23 + 30 �0.30 + 40 �0.15 + 65 �0.11  30.15
E (Y 2 )  142 �0.21 + 22 2 �0.23 + 302 �0.30 + 402 �0.15 + 652 �0.11  1127.23
var(Y )  E (Y 2 ) - [ E (Y )]2  218.21
s Y  14.77
4 Stock/Watson • Introduction to Econometrics, Third Edition
(b) The conditional probability of Y|X  8 is given in the table below
Value of Y
14 22 30 40 65
0.02/0.39 0.03/0.39 0.15/0.39 0.10/0.39 0.09/0.39
E (Y | X  8)  14 �(0.02/0.39) + 22 �(0.03/0.39) + 30 �(0.15/0.39)

+ 40 �(0.10/0.39) + 65 �(0.09/0.39)  39.21
E (Y | X  8)  142 �(0.02/0.39) + 222 �(0.03/0.39) + 302 �(0.15/0.39)
2
+ 402 �(0.10/0.39) + 652 �(0.09/0.39)  1778.7

var(Y )  1778.7 - 39.212  241.65
s Y | X 8  15.54
(c) E ( XY )  (1 �14 �0.02) + (1 �22 : 0.05) + L + (8 �65 �0.09)  171.7

cov( X , Y )  E ( XY ) - E ( X ) E (Y )  171.7 - 5.33 �30.15  11.0
corr( X , Y )  cov( X , Y )/(s X s Y )  11.0 / (2.60 �14.77)  0.286
2.11. (a) 0.90

(b) 0.05
(c) 0.05
(d) When Y ~ c10 , then

2
Y /10 ~ F10,�.
(e) Y  Z , where Z ~ N (0,1), thus Pr (Y �1)  Pr ( -1 �Z �1)  0.32.

2
(a) E (Y )  Var (Y ) + mY  1 + 0  1; E (W )  Var (W ) + mW  100 + 0  100.

2 2 2 2
2.13.
(b) Y and W are symmetric around 0, thus skewness is equal to 0; because their mean is zero, this
means that the third moment is zero.
(c) The kurtosis of the normal is 3, so 3  E (Y - mY ) /s Y ; solving yields E(Y )  3; a similar

4 4 4
calculation yields the results for W.
X  0, so that S  W :
(d) First, condition on
E ( S | X  0)  0; E ( S 2 | X  0)  100, E ( S 3 |X  0)  0, E ( S 4 | X  0)  3 �100 2.

Similarly,
E ( S | X  1)  0; E ( S | X  1)  1, E ( S | X  1)  0, E ( S | X  1)  3.
2 3 4
From the law of iterated expectations
E ( S )  E ( S | X  0) �Pr (X  0) + E ( S | X  1) �Pr( X  1)  0
E ( S 2 )  E ( S 2 | X  0) �Pr (X  0) + E ( S 2 | X  1) �Pr( X  1)  100 �0.01 + 1 �0.99  1.99
E ( S 3 )  E ( S 3 | X  0) �Pr (X  0) + E ( S 3 | X  1) �Pr( X  1)  0
E ( S 4 )  E ( S 4 | X  0) �Pr (X  0) + E ( S 4 | X  1) �Pr( X  1)
 3 �1002 �0.01 + 3 �1�0.99  302.97
(e) m S  E ( S )  0, thus E ( S - m S )  E ( S )  0 from part (d). Thus skewness  0. Similarly,

3 3
s S2  E ( S - mS ) 2  E ( S 2 )  1.99, and E ( S - mS )4  E ( S 4 )  302.97. Thus,

kurtosis  302.97 / (1.992 )  76.5
�9.6 - 10 Y - 10 10.4 - 10 �
Pr (9.6 �Y �10.4)  Pr � � � �
� 4/n 4/n 4/n �
�9.6 - 10 10.4 - 10 �
 Pr � �Z � �
2.15. (a) � 4/n 4/n �
where Z ~ N(0, 1). Thus,
�9.6 - 10 10.4 - 10 �
Pr � �Z � � Pr ( -0.89 �Z �0.89)  0.63
(i) n  20; � 4/ n 4/ n �
�9.6 - 10 10.4 - 10 �
Pr � �Z � � Pr(-2.00 �Z �2.00)  0.954
(ii) n  100; � 4/n 4/n �
�9.6 - 10 10.4 - 10 �
Pr � �Z � � Pr(-6.32 �Z �6.32)  1.000
(iii) n  1000; � 4/n 4/n �
� -c Y - 10 c �
Pr (10 - c �Y �10 + c)  Pr � � � �
� 4/n 4/n 4/n �
� -c c �
 Pr � �Z � .
�
(b) � 4/n 4/n �
c
As n get large 4 / n gets large, and the probability converges to 1.
(c) This follows from (b) and the definition of convergence in probability given in Key Concept 2.6.
mY = 0.4 and s Y  0.4 �0.6  0.24

2
2.17.
�Y - 0.4 0.43 - 0.4 � �Y - 0.4 �
Pr � � � Pr � �0.6124 � 0.27
(a) (i) P( Y  0.43)  � 0.24/n 0.24/n � � 0.24/n �
�Y - 0.4 0.37 - 0.4 � �Y - 0.4 �
Pr � � � Pr � �-1.22 � 0.11
(ii) P( Y  0.37)  � 0.24/n 0.24/n � � 0.24/n �
0.41 - 0.40
0.41  > -1.96
(b) We know Pr(-1.96  Z  1.96)  0.95, thus we want n to satisfy 24 / n
0.39 - 0.40
 -1.96.
and 24 / n Solving these inequalities yields n  9220.
l
Pr (Y  y j )  �Pr ( X  xi , Y  y j )
i 1
l
 �Pr (Y  y j | X  xi )Pr ( X  xi )
2.19. (a) i 1
k k l
E (Y )  �y j Pr (Y  yj )  �yj �Pr (Y  yj |X  xi ) Pr ( X  xi )
j 1 j 1 i 1
l �k �
� �yj Pr (Y  yj |X  xi ) �Pr ( X  xi )
� �
�
� �
i 1 �
�j 1
�
�
l
�E (Y | X  xi )Pr ( X  xi ).
(b) i 1
(c) When X and Y are independent,

Pr (X  xi , Y  yj )  Pr (X  xi )Pr (Y  yj ),
so
s XY  E[( X - m X )(Y - mY )]
l k
��( xi - m X )( y j - mY ) Pr ( X  xi , Y  y j )
i 1 j 1
l k
��( xi - mX )( y j - mY ) Pr ( X  xi ) Pr (Y  y j )
i 1 j 1
�l �k
� �
� �
�i 1
( xi - m X ) Pr ( X  x )
i ��
�
� ( yj - mY ) Pr (Y  yj �
�j 1 �
 E ( X - m X ) E (Y - mY )  0 �0  0,
s XY 0
corr(X , Y )    0.
s Xs Y s Xs Y
E ( X - m )3  E[( X - m ) 2 ( X - m )]  E[ X 3 - 2 X 2 m + X m 2 - X 2 m + 2 X m 2 - m 3 ]
 E ( X 3 ) - 3E ( X 2 ) m + 3E ( X ) m 2 - m 3  E ( X 3 ) - 3E ( X 2 ) E ( X )
+ 3E ( X )[ E ( X )]2 - [ E ( X )]3
2.21. (a)  E ( X 3 ) - 3E ( X 2 ) E ( X ) + 2 E ( X ) 3
E ( X - m )  E[( X - 3 X m + 3 X m - m )( X - m )]
4 3 2 2 3
 E[ X 4 - 3 X 3 m + 3 X 2 m 2 - X m 3 - X 3 m + 3 X 2 m 2 - 3 X m 3 + m 4 ]
 E ( X 4 ) - 4 E ( X 3 ) E ( X ) + 6 E ( X 2 ) E ( X ) 2 - 4 E ( X ) E ( X )3 + E ( X ) 4
(b)  E ( X 4 ) - 4[ E ( X )][ E ( X 3 )] + 6[ E ( X )]2 [ E ( X 2 )] - 3[ E ( X )]4
2.23. X and Z are two independently distributed standard normal random variables, so
m X  m Z  0, s X2  s Z2  1, s XZ  0.
(a) Because of the independence between X and Z , Pr ( Z  z| X  x)  Pr ( Z  z ), and

E ( Z |X )  E ( Z )  0. Thus E (Y | X )  E ( X 2 + Z| X )  E ( X 2| X ) + E ( Z |X )  X 2 + 0  X 2 .
(b) E ( X )  s X + m X  1, and mY  E ( X + Z )  E ( X ) + m Z  1 + 0  1.
2 2 2 2 2
(c) E ( XY )  E ( X + ZX )  E ( X ) + E ( ZX ). Using the fact that the odd moments of a standard
3 3
normal random variable are all zero, we have E ( X )  0. Using the independence between
3
X and Z , we have E ( ZX )  m Z m X  0. Thus E ( XY )  E ( X ) + E ( ZX )  0.

3
cov (XY )  E[( X - m X )(Y - mY )]  E[( X - 0)(Y - 1)]

 E ( XY - X )  E ( XY ) - E ( X )
 0 - 0  0.
s XY 0
corr (X , Y )    0.
(d)
s Xs Y s Xs Y
n n
�ax i  (ax1 + ax2 + ax3 + L + axn )  a ( x1 + x2 + x3 + L + xn )  a �xi

2.25. (a) i 1 i 1
�( x + y )  ( x
i 1
i i 1 + y1 + x2 + y2 + L xn + yn )
 ( x1 + x2 + L xn ) + ( y1 + y2 + L yn )
n n
 �xi + �yi
(b) i 1 i 1
�a  (a + a + a + L + a )  na
(c) i 1
n n
�(a + bxi + cyi )2  �(a 2 + b2 xi2 + c 2 yi2 + 2abxi + 2acyi + 2bcxi yi )

i 1 i 1
n n n n n
 na 2 + b 2 �xi2 + c 2 �yi2 + 2ab�xi + 2ac�yi + 2bc �xi yi
(d) i 1 i 1 i 1 i 1 i 1
2.27 (a) E(W)  E[E(W|Z)]  E[E(X - X%)|Z]  E[E(X|Z) - E(X|Z)]  0.

(b) E(WZ)  E[E(WZ|Z)]  E[ZE(W)|Z]  E[ Z  0]  0
(c) Using the hint: V  W - h(Z), so that E(V2)  E(W2) + E[h(Z)2] - 2  E[W  h(Z)]. Using an
argument like that in (b), E[W  h(Z)]  0. Thus, E(V2)  E(W2) + E[h(Z)2], and the result
follows by recognizing that E[h(Z)2]  0 because h(z)2  0 for any value of z.
Chapter 3
Review of Statistics
3.1. The central limit theorem suggests that when the sample size ( n ) is large, the distribution of the

s Y2
N �m , s �
� 2� s 2
 .
sample average ( Y ) is approximately � Y Y � with
Y
n Given a population mY  100,
s Y2  43.0, we have
s Y2 43
s Y2    0.43,
(a) n  100, n 100 and
�Y - 100 101 - 100 �
Pr (Y  101)  Pr �  ��F(1.525)  0.9364.
� 0.43 0.43 �
s Y2 43
s Y2    0.6719,
(b) n  64, n 64 and
101 - 100 Y - 100 103 - 100 �
�
Pr(101  Y  103)  Pr �   �
� 0.6719 0.6719 0.6719 �
�F (3.6599) - F (1.2200)  0.9999 - 0.8888  0.1111.
s Y2 43
s Y2    0.2606,
(c) n  165, n 165 and
�Y - 100 98 - 100 �
Pr (Y > 98)  1 - Pr (Y �98)  1 - Pr � � �
� 0.2606 0.2606 �
�1 - F(-3.9178)  F(3.9178)  1.0000 (rounded to four decimal places).
Denote each voter’s preference by Y . Y  1 if the voter prefers the incumbent and Y  0 if the

3.3.
voter prefers the challenger. Y is a Bernoulli random variable with probability Pr (Y  1)  p and
Pr (Y  0)  1 - p. From the solution to Exercise 3.2, Y has mean p and variance p (1 - p ).
215
pˆ   0.5375.
400
(a)
� pˆ )  pˆ (1 - pˆ )  0.5375 �(1 - 0.5375)  6.2148 �10-4.

var(
(b)The estimated variance of p̂ is n 400 The
1
standard error is SE ( pˆ )  (var( pˆ ))  0.0249.

2
(c) The computed tstatistic is
pˆ - m p ,0 0.5375 - 0.5
t act    1.506.
SE( pˆ ) 0.0249
Because of the large sample size ( n  400), we can use Equation (3.14) in the text to get the

pvalue for the test H 0 : p  0.5 vs. H1 : p �0.5 :
p -value  2F(-|t act |)  2F (-1.506)  2 �0.066  0.132.
(d) Using Equation (3.17) in the text, the pvalue for the test H 0 : p  0.5 vs. H1 : p > 0.5 is

p-value  1 - F(t act )  1 - F(1.506)  1 - 0.934  0.066.
(e) Part (c) is a twosided test and the pvalue is the area in the tails of the standard normal
distribution outside  (calculated tstatistic). Part (d) is a onesided test and the pvalue is the
area under the standard normal distribution to the right of the calculated tstatistic.
(f) For the test H 0 : p  0.5 vs. H1 : p > 0.5, we cannot reject the null hypothesis at the 5%
significance level. The pvalue 0.066 is larger than 0.05. Equivalently the calculated tstatistic
1.506 is less than the critical value 1.64 for a onesided test with a 5% significance level. The
test suggests that the survey did not contain statistically significant evidence that the
incumbent was ahead of the challenger at the time of the survey.
3.5. (a) (i) The size is given by Pr(| pˆ - 0.5| > .02), where the probability is computed assuming

that p  0.5.
Pr(|pˆ - 0.5| > 0.02)  1 - Pr( -0.02 �pˆ - 0.5 �.02)

� -0.02 pˆ - 0.5 0.02 �
 1 - Pr � � � �
� 0.5 �0.5/1055 0.5 �0.5/1055 0.5 �0.5/1055 �
� pˆ - 0.5 �
 1 - Pr �-1.30 � �1.30 �
� 0.5 �0.5/1055 �
 0.19
where the final equality using the central limit theorem approximation.
(ii) The power is given by Pr(| pˆ - 0.5| > 0.02), where the probability is computed assuming
that p  0.53.
Pr(|pˆ - 0.5| > 0.02)  1 - Pr( -0.02 �pˆ - 0.5 �.02)
� -0.02 pˆ - 0.5 0.02 �
 1 - Pr � � � �
� 0.53 �0.47/1055 0.53 �0.47/1055 0.53 �0.47/1055 �
� -0.05 pˆ - 0.53 -0.01 �
 1 - Pr � � � �
� 0.53 �0.47/1055 0.53 �0.47/1055 0.53 �0.47/1055 �
� pˆ - 0.53 �
 1 - Pr �-3.25 � �-0.65 �
� .53 �0.47/1055 �
 0.74
where the final equality using the central limit theorem approximation.
0.54 - 0.50
t  2.61, and Pr(|t| > 2.61)  0.01,
(b) (i)
(0.54 �0.46) / 1055 so that the null is rejected at the
5% level.
(ii) Pr(t > 2.61)  .004, so that the null is rejected at the 5% level.
(iii) 0.54 �1.96 (0.54 �0.46) / 1055  0.54 �0.03, or 0.51 to 0.57.
(iv) 0.54 �2.58 (0.54 �0.46) / 1055  0.54 �0.04, or 0.50 to 0.58.
(v) 0.54 �0.67 (0.54 �0.46) / 1055  0.54 �0.01, or 0.53 to 0.55.
(c) (i) The probability is 0.95 is any single survey, there are 20 independent surveys, so the
probability if 0.95  0.36
20
(ii) 95% of the 20 confidence intervals or 19.
1.96 �SE( pˆ )  .01 or 1.96 � p(1 - p) / n  .01.
(d) The relevant equation is Thus n must be
1.96 p (1 - p )
2
n> ,
chosen so that 0.012 so that the answer depends on the value of p. Note that the
largest value that p(1 − p) can take on is 0.25 (that is, p  0.5 makes p(1 - p) as large as
1.962 �0.25
n>  9604,
possible). Thus if 0.012 then the margin of error is less than 0.01 for all
values of p.
3.7. The null hypothesis is that the survey is a random draw from a population with p = 0.11. The t
pˆ - 0.11
t ,
statistic is SE( pˆ ) where SE( pˆ )  pˆ (1 - pˆ )/n. (An alternative formula for SE( p̂ ) is
0.11 �(1 - 0.11) / n, which is valid under the null hypothesis that p  0.11). The value of the t
statistic is 2.71, which has a pvalue of that is less than 0.01. Thus the null hypothesis p  0.11
(the survey is unbiased) can be rejected at the 1% level.
3.9. Denote the life of a light bulb from the new process by Y . The mean of Y is m and the standard

deviation of Y is s Y  200 hours. Y is the sample mean with a sample size n  100. The
sY 200
sY    20
standard deviation of the sampling distribution of Y is n 100 hours. The
hypothesis test is H 0 : m  2000 vs. H1 : m > 2000 . The manager will accept the alternative
hypothesis if Y > 2100 hours.
(a) The size of a test is the probability of erroneously rejecting a null hypothesis when it is valid.
The size of the manager’s test is
size  Pr(Y > 2100| m  2000)  1 - Pr(Y �2100| m  2000)

�Y - 2000 2100 - 2000 �
 1 - Pr � � |m  2000 �
� 20 20 �
-7
 1 - F (5)  1 - 0.999999713  2.87 �10 ,
where Pr(Y > 2100|m  2000) means the probability that the sample mean is greater than 2100

hours when the new process has a mean of 2000 hours.
(b) The power of a test is the probability of correctly rejecting a null hypothesis when it is invalid. We
calculate first the probability of the manager erroneously accepting the null hypothesis when it is
invalid:
�Y - 2150 2100 - 2150 �

b  Pr(Y �2100|m  2150)  Pr � � |m  2150 �
� 20 20 �
 F (-2.5)  1 - F (2.5)  1 - 0.9938  0.0062.
The power of the manager’s testing is 1 - b  1 - 0.0062  0.9938.

(c) For a test with 5%, the rejection region for the null hypothesis contains those values of the
tstatistic exceeding 1.645.
act
- 2000
t act  Y > 1.645 � Y act > 2000 + 1.645 �20  2032.9.
20
The manager should believe the inventor’s claim if the sample mean life of the new product is
greater than 2032.9 hours if she wants the size of the test to be 5%.
3.11. Assume that n is an even number. Then Y% is constructed by applying a weight of 1/2 to the n/2

“odd” observations and a weight of 3/2 to the remaining n/2 observations.
1 �1 3 1 3 �
E (Y%
) �� E (Y1 ) + E (Y2 ) + L E (Yn -1 ) + E (Yn ) �
�
n��2 2 2 2 �
�
1 �1 n 3 n �
 � �� mY + � � mY � mY
n �2 2 2 2 �
1 �1 9 1 9 �
var(Y%
)  2 � var(Y1 ) + var(Y2 ) + L var(Yn -1 ) + var(Yn ) �
n �4 4 4 4 �
1 �1 n 2 9 n 2 � s 2
 2 � �� sY + � � s Y � 1.25 Y .
n �4 2 4 2 � n
3.13 (a) Sample size n  420, sample average Y  646.2 sample standard deviation sY  19.5.

s 19.5
(Y )  Y   0.9515.
Y
The standard error of is SE n 420 The 95% confidence interval for
the mean test score in the population is
m  Y �1.96SE(Y )  646.2 �1.96 �0.9515  (644.34, 648.06).
(b) The data are: sample size for small classes n1  238, sample average Y 1  657.4, sample

s  19.4;
standard deviation 1 sample size for large classes n2  182, sample average
Y 2  650.0, sample standard deviation s2  17.9. The standard error of Y1 - Y2 is
s12 s22 19.42 17.92
SE (Y1 - Y2 )  +  +  1.8281.
n1 n2 238 182
The hypothesis tests for higher average
scores in smaller classes is
H 0 : m1 - m 2  0 vs. H1 : m1 - m2 > 0.
The tstatistic is
t act  Y 1 - Y 2  657.4 - 650.0  4.0479.

SE(Y 1 - Y 2) 1.8281
The pvalue for the onesided test is:
p -value  1 - F (t act )  1 - F (4.0479)  1 - 0.999974147  2.5853 �10-5.
With the small pvalue, the null hypothesis can be rejected with a high degree of confidence.
There is statistically significant evidence that the districts with smaller classes have higher
average test scores.
3.15. From the textbook equation (2.46), we know that E( Y )  mY and from (2.47) we know that

s Y2
var( Y )  n . In this problem, because Ya and Yb are Bernoulli random variables, pˆ a  Ya , pˆ b 
Yb , s Ya2  p (1–p ) and s Yb2  p (1–p ). The answers to (a) follow from this. For part (b), note that
a a b b
var( pˆ a – pˆ b )  var( pˆ a ) + var( pˆ b ) – 2cov( pˆ a , pˆ b ). But, they are independent (and thus have

cov(pˆ a ,pˆ b )  0 because pˆ a and pˆ b are independent (they depend on data chosen from independent
samples). Thus var( pˆ a – pˆ b )  var( pˆ a ) + var( pˆ b ). For part (c), use equation 3.21 from the text

(replacing Y with p̂ and using the result in (b) to compute the SE). For (d), apply the formula in
(c) to obtain
0.859(1 - 0.859) 0.374(1 - 0.374)
+
95% CI is (.859 – .374) ± 1.96 5801 4249 or 0.485 ± 0.017.
Ym , 2008 - Ym, 1992 �1.96 SE(Ym , 2008 - Ym, 1992 )

3.17. (a) The 95% confidence interval is where
2 2
s m ,2008 s m ,1992 11.782 10.17 2
SE(Ym, 2008 - Ym , 1992 )  +  +  0.37;
nm ,2008 nm,1992 1838 1594
the 95% confidence
interval is (24.98 - 23.27) ± 0.73 or 1.71 ± 0.73.
Yw, 2008 - Yw, 1992 �1.96 SE(Yw, 2008 - Yw, 1992 )
(b) The 95% confidence interval is where
2 2
s w ,2008 s w ,1992 9.662 7.782
SE(Yw, 2008 - Yw, 1992 )  +  +  0.31;
nw,2008 nw,1992 1871 1368
the 95% confidence interval
is (20.87 - 20.05) �0.60 or 0.82  0.60.
(Y -Y ) - (Yw, 2004 - Yw, 1992 ) �1.96 SE[(Ym , 2008 - Ym , 1992 ) -
(c) The 95% confidence interval is m , 2004 m , 1992
(Yw, 2008 - Yw, 1992 )], SE[(Ym , 2008 - Ym , 1992 ) - (Yw, 2008 - Yw, 1992 )] 
where
sm2 ,2008 sm2 ,1992 sw2 ,2008 sw2 ,1992
11.782 10.17 2 9.662 7.782
+ + ++ + + 
nm ,2008 nm,1993 nw,2008 nw,1992 1594 1871 1368  0.48. The 95%
1838
confidence interval is (24.9823.27) − (20.87−20.05) ± 1.96  0.48 or 0.89 ± 0.95.
E (Yi 2 )  s Y2 + mY2 and E (YiY j )  mY2 for i �j.

3.19. (a) No. Thus
2
�1 n � 1 n 1 n
1
E (Y )  E � �Yi � 2 �E (Yi 2 ) + 2
2
��E (Y Y )  m
i j
2
Y + s Y2
�n i 1 � n i 1 n i 1 j �i n
2
(b) Yes. If Y gets arbitrarily close to mY with probability approaching 1 as n gets large, then Y
gets arbitrarily close to mY with probability approaching 1 as n gets large. (As it turns out,
2
this is an example of the “continuous mapping theorem” discussed in Chapter 17.)
3.21. Set nm  nw  n, and use equation (3.19) write the squared SE of Ym - Yw as
1 1
�in1 (Ymi - Ym ) 2 �in1 (Ywi - Yw ) 2
( n - 1) (n - 1)
[ SE (Ym - Yw )] 
2
+
n n
�in1 (Ymi - Ym ) 2 + �in1 (Ywi - Yw ) 2

 .
n( n - 1)
Similarly, using equation (3.23)
1 �n 1 �
�i 1 (Ymi - Ym ) 2 +
� �in1 (Ywi - Yw )2 �
2( n - 1) � (n - 1) �
[ SE pooled (Ym - Yw )]2 
2n
�in1 (Ymi - Ym )2 + �in1 (Ywi - Yw ) 2

 .
n(n - 1)
Chapter 4
Linear Regression with One Regressor
4.1. (a) The predicted average test score is

�
TestScore  520.4 - 5.82 �22  392.36
(b) The predicted change in the classroom average test score is
�
DTestScore  (-5.82 �19) - (-5.82 �23)  23.28
(c) Using the formula for b̂ 0 in Equation (4.8), we know the sample average of the test scores

across the 100 classrooms is
TestScore  bˆ 0 + bˆ 1 �CS  520.4 - 5.82 �21.4  395.85.
(d) Use the formula for the standard error of the regression (SER) in Equation (4.19) to get the
sum of squared residuals:
SSR  (n - 2) SER 2  (100 - 2) �11.52  12961.
2
Use the formula for R in Equation (4.16) to get the total sum of squares:
SSR 12961
TSS    13044.
1- R 2
1 - 0.082
 13044  131.8. s  sY2  11.5.

The sample variance is sY  n-1
2 TSS
99 Thus, standard deviation is Y
4.3. (a) The coefficient 9.6 shows the marginal effect of Age on AWE; that is, AWE is expected to

increase by $9.6 for each additional year of age. 696.7 is the intercept of the regression line. It
determines the overall level of the line.
(b) SER is in the same units as the dependent variable (Y, or AWE in this example). Thus SER is
measured in dollars per week.
(c) R2 is unit free.
(d) (i) 696.7 + 9.6 �25  $936.7;
(ii) 696.7 + 9.6 �45  $1,128.7
(e) No. The oldest worker in the sample is 65 years old. 99 years is far outside the range of the
sample data.
(f) No. The distribution of earning is positively skewed and has kurtosis larger than the normal.
ˆ ˆ ˆ ˆ
(g) b 0  Y - b1 X , so that Y  b 0 + b1 X . Thus the sample mean of AWE is 696.7 + 9.6  41.6 
$1,096.06.
4.5. (a) ui represents factors other than time that influence the student’s performance on the exam

including amount of time studying, aptitude for the material, and so forth. Some students will
have studied more than average, other less; some students will have higher than average
aptitude for the subject, others lower, and so forth.
(b) Because of random assignment ui is independent of Xi. Since ui represents deviations from
average E(ui)  0. Because u and X are independent E(ui|Xi)  E(ui)  0.
(c) (2) is satisfied if this year’s class is typical of other classes, that is, students in this year’s
class can be viewed as random draws from the population of students that enroll in the class.
(3) is satisfied because 0  Yi  100 and Xi can take on only two values (90 and 120).
(d) (i) 49 + 0.24 �90  70.6; 49 + 0.24 �120  77.8; 49 + 0.24 �150  85.0
(ii) 0.24 �10  2.4.
4.7. The expectation of b̂ 0 is obtained by taking expectations of both sides of Equation (4.8):

�
�
1 n � �
E ( bˆ0 )  E (Y - bˆ1 X )  E � � ui �- bˆ1 X �
� �
�b 0 + b1 X +
�
�
� n i 1 � �
�
1 n
 b 0 + E (b1 - bˆ1 ) X + �E (ui )
n i 1
 b0
where the third equality in the above equation has used the facts that E(ui)  0 and E[( b̂1 −b1) X ] 

ˆ
E[(E( b̂1 −b )| X ) X ]  because E[( b1 - b1 ) | X ]  0 (see text equation (4.31).)
1
ˆ ˆ ˆ ˆ
4.9. (a) With b1  0, b0  Y , and Yi  b 0  Y . Thus ESS  0 and R2  0.
ˆ ˆ ˆ ˆ ˆ
(b) If R2  0, then ESS  0, so that Yi  Y for all i. But Yi  b 0 + b1 X i , so that Yi  Y for all i,
ˆ
which implies that b1  0, or that X is constant for all i. If X is constant for all i, then
i i
�
n
( Xi - X )  0
2
i -1 and b̂1 is undefined (see equation (4.7)).
(a) The least squares objective function is �i 1
n
(Yi - b1 X i ) 2.
4.11. Differentiating with respect to b1
n
��(Yi - b1 X i ) 2
 -2�i 1 X i (Yi - b1 X i ).
i 1 n
yields �
b1 Setting this zero, and solving for the least
n
�X Y i i
bˆ1  i 1
n
.
�X i
2
squares estimator yields i 1
�X (Y - 4) i i
bˆ1  i 1
n
.
�X i
2
(b) Following the same steps in (a) yields i 1
4.13. The answer follows the derivations in Appendix 4.3 in “LargeSample Normal Distribution of the
OLS Estimator.” In particular, the expression for i is now i  (Xi - mX)ui, so that var(i) 
3var[(Xi - mX)ui], and the term 2 carry through the rest of the calculations.
Chapter 5
Regression with a Single Regressor: Hypothesis
Tests and Confidence Intervals
5.1 (a) The 95% confidence interval for b1 is {-5.82 �1.96 �2.21}, that is

-10.152 �b1 �-1.4884.
(b) Calculate the tstatistic:
bˆ 1 - 0 -5.82
t act    -2.6335.
SE( bˆ 1) 2.21
The pvalue for the test H 0 : b1  0 vs. H1 : b1 �0 is

p -value  2F(-|t act |)  2F (-2.6335)  2 �0.0042  0.0084.
The pvalue is less than 0.01, so we can reject the null hypothesis at the 5% significance level,
and also at the 1% significance level.
(c) The tstatistic is
bˆ 1 - (-5.6) 0.22
t act    0.10
SE ( bˆ 1) 2.21
The pvalue for the test H 0 : b1  -5.6 vs. H1 : b1 �-5.6 is

p -value  2F (-|t act |)  2F (-0.10)  0.92
The pvalue is larger than 0.10, so we cannot reject the null hypothesis at the 10%, 5% or 1%
significance level. Because b1  -5.6 is not rejected at the 5% level, this value is contained in
the 95% confidence interval.
(d) The 99% confidence interval for b 0 is {520.4 �2.58 �20.4}, that is, 467.7 �b 0 �573.0.
5.3. The 99% confidence interval is 1.5  {3.94  2.58  0.31) or 4.71 lbs  WeightGain  7.11 lbs.
5.5 (a) The estimated gain from being in a small class is 13.9 points. This is equal to

approximately 1/5 of the standard deviation in test scores, a moderate increase.
Solutions to EndofChapter Exercises 21
13.9
t act 
 5.56,
(b) The tstatistic is 2.5 which has a pvalue of 0.00. Thus the null hypothesis is
rejected at the 5% (and 1%) level.
(c) 13.9  2.58  2.5  13.9  6.45.
3.2
 2.13
5.7. (a) The tstatistic is 1.5 with a pvalue of 0.03; since the pvalue is less than 0.05, the
null hypothesis is rejected at the 5% level.
(b) 3.2  1.96  1.5  3.2  2.94
(c) Yes. If Y and X are independent, then b1  0; but this null hypothesis was rejected at the
5% level in part (a).
(d) b1 would be rejected at the 5% level in 5% of the samples; 95% of the confidence intervals
would contain the value b1  0.
1
(Y1 + Y2 + L + Yn )
b n
5.9. (a) X so that it is linear function of Y1, Y2, , Yn.

(b) E(Yi|X1, , Xn)  bXi, thus
� �1 � �
� �n (Y1 + Y2 + L + Yn ) � �
E ( b |X 1 , K , X n )  E � � �| ( X 1 , K , X n ) �
� � X � �
� � � �
1
b ( X1 + L + X n )
n  b.
X
sm
SE (Ym ) 
ˆ ˆ
Using the results from 5.10, b 0  Ym and b1  Yw - Ym . From Chapter 3,
nm
5.11. and
2 2
s s
SE (Yw - Ym )  m
+ . w
ˆ ˆ ˆ
Plugging in the numbers b 0  523.1 and SE ( b 0 )  6.22; b1  -38.0 and
nm nw
SE ( bˆ1 )  7.65.
5.13. (a) Yes, this follows from the assumptions in KC 4.3.

(b) Yes, this follows from the assumptions in KC 4.3 and conditional homoskedasticity
(c) They would be unchanged for the reasons specified in the answers to those questions.
(d) (a) is unchanged; (b) is no longer true as the errors are not conditionally homosckesdastic.
bˆ bˆ var ( bˆm ,1 - bˆw,1 ) 

5.15. Because the samples are independent, m ,1 and w,1 are independent. Thus
var ( bˆm ,1 ) + var( bˆw,1 ). Var ( bˆm ,1 ) [SE( bˆm ,1 )]2 Var (bˆw,1 )
is consistently estimated as and is
ˆ
[SE( b w,1 )] , 2 ˆ ˆ
var( b m,1 - b w,1 )
consistently estimated as so that is consistently estimated by
[SE( bˆm ,1 )]2 + [SE( bˆw,1 )]2 ,
and the result follows by noting the SE is the square root of the
estimated variance.
Chapter 6
Linear Regression with
Multiple Regressors
6.1. By equation (6.15) in the text, we know
n -1
R2 1- (1 - R 2 ).
n - k -1
2
Thus, that values of R are 0.175, 0.189, and 0.193 for columns (1)–(3).
6.3. (a) On average, a worker earns $0.29/hour more for each year he ages.
(b) Sally’s earnings prediction is 4.40 + 5.48 �1 - 2.62 �1 + 0.29 �29  15.67 dollars per hour.
Betsy’s earnings prediction is 4.40 + 5.48 �1 - 2.62 �1 + 0.29 �34  17.12 dollars per hour.
The difference is 1.45
6.5. (a) $23,400 (recall that Price is measured in $1000s).
(b) In this case DBDR  1 and DHsize  100. The resulting expected change in price is 23.4 +
0.156  100  39.0 thousand dollars or $39,000.
(c) The loss is $48,800.
R 2  1 - n -n -k 1-1 (1 - R 2 ), R 2  1 - n -n -k1-1 (1 - R 2 ),
(d) From the text so thus, R2  0.727.
6.7. (a) The proposed research in assessing the presence of gender bias in setting wages is too

limited. There might be some potentially important determinants of salaries: type of engineer,
amount of work experience of the employee, and education level. The gender with the lower
wages could reflect the type of engineer among the gender, the amount of work experience of
the employee, or the education level of the employee. The research plan could be improved
with the collection of additional data as indicated and an appropriate statistical technique for
analyzing the data would be a multiple regression in which the dependent variable is wages
and the independent variables would include a dummy variable for gender, dummy variables
for type of engineer, work experience (time units), and education level (highest grade level
completed). The potential importance of the suggested omitted variables makes a “difference
in means” test inappropriate for assessing the presence of gender bias in setting wages.
(b) The description suggests that the research goes a long way towards controlling for
potential omitted variable bias. Yet, there still may be problems. Omitted from the
analysis are characteristics associated with behavior that led to incarceration
(excessive drug or alcohol use, gang activity, and so forth), that might be correlated
with future earnings. Ideally, data on these variables should be included in the
analysis as additional control variables.
6.9. For omitted variable bias to occur, two conditions must be true: X1 (the included
regressor) is correlated with the omitted variable, and the omitted variable is a
determinant of the dependent variable. Since X1 and X2 are uncorrelated, the estimator of
b1 does not suffer from omitted variable bias.
6.11. (a) �(Y - b X

i 1 1i - b2 X 2i ) 2
��(Yi - b1 X1i - b2 X 2i ) 2
 -2�X 1i (Yi - b1 X 1i - b2 X 2i )
�b1
��(Yi - b1 X 1i - b2 X 2i ) 2
 -2�X 2i (Yi - b1 X 1i - b2 X 2i )
� b2
(b)
ˆ
(c) From (b), b1 satisfies
�X 1i (Yi - bˆ1 X1i - bˆ1 X 2i )  0
�X 1iYi - bˆ2 �X 1i X 2i
bˆ1 
�X 12i
or
and the result follows immediately.
(d) Following analysis as in (c)
�X 2iYi - bˆ1 �X 1i X 2i
bˆ2 
�X 22i
and substituting this into the expression for b̂1 in (c) yields
�X 1iY � 2 i i X1 �
X Y - bˆ X 1i X 2 i
�X 1i X 2 i
ˆ
b1  � 2
2i
.
�X 12i
Solving for b̂1 yields:
�X 22i �X 1iYi - �X 1i X 2i �X 2iYi

bˆ1 
�X 12i �X 22i - (�X 1i X 2i ) 2
(e) The least squares objective function is � i 0 1 1i 2 2 i and the partial

(Y - b - b X - b X ) 2
derivative with respect to b0 is
��(Yi - b0 - b1 X 1i - b2 X 2 i )
2
 -2�(Yi - b0 - b1 X 1i - b2 X 2 i ).
� b0
ˆ ˆ ˆ
Setting this to zero and solving for b̂ 0 yields: b 0  Y - b1 X 1 - b 2 X 2 .
ˆ ˆ ˆ
(f) Substituting b 0  Y - b1 X 1 - b 2 X 2 into the least squares objective function yields
�(Yi - bˆ0 - b1 X1i - b2 X 2i )2  �( (Yi - Y ) - b1 ( X1i - X1 ) - b2 ( X 2i - X 2 ) ) , which is
2
identical to the least squares objective function in part (a), except that all variables
have been replaced with deviations from sample means. The result then follows as in
(c).
Notice that the estimator for b1 is identical to the OLS estimator from the regression
of Y onto X1, omitting X2. Said differently, when � 1i
( X - X 1 )( X 2i - X 2 )  0
, the
estimated coefficient on X1 in the OLS regression of Y onto both X1 and X2 is the
same as estimated coefficient in the OLS regression of Y onto X1.
Chapter 7
Hypothesis Tests and Confidence
Intervals in Multiple Regression
7.1 and 7.2
Regressor (1) (2) (3)
College (X1) 5.46** 5.48** 5.44**
(0.21) (0.21) (0.21)
Female (X2) - 2.64** - 2.62** - 2.62**
(0.20) (0.20) (0.20)
Age (X3) 0.29** 0.29**
(0.04) (0.04)
Ntheast (X4) 0.69*
(0.30)
Midwest (X5) 0.60*
(0.28)
South (X6) - 0.27
(0.26)
Intercept 12.69** 4.40** 3.75**
(0.14) (1.05) (1.06)
(a) The tstatistic is 5.46/0.21  26.0, which exceeds 1.96 in absolute value. Thus, the coefficient
is statistically significant at the 5% level. The 95% confidence interval is 5.46  1.96  0.21.
(b) tstatistic is - 2.64/0.20  -13.2, and 13.2 > 1.96, so the coefficient is statistically significant
at the 5% level. The 95% confidence interval is -2.64  1.96  0.20.
7.3. (a) Yes, age is an important determinant of earnings. Using a ttest, the tstatistic is

0.29 / 0.04  7.25, with a pvalue of 4.2  10-13, implying that the coefficient on age is
statistically significant at the 1% level. The 95% confidence interval is 0.29  1.96  0.04.
(b) DAge  [0.29  1.96  0.04]  5  [0.29  1.96  0.04]  1.45  1.96  0.20  $1.06 to $1.84
bˆcollege,1998 - bˆcollege,1992
t
SE( bˆcollege,1998 - bˆcollege, 1992 )
7.5. The tstatistic for the difference in the college coefficients is . Because
b̂ college,1998 b̂
and college,1992 are computed from independent samples, they are independent, which
cov( bˆcollege,1998 , bˆcollege,1992 )  0 var( bˆcollege,1998 - bˆcollege,1992 )
means that Thus, =
var( bˆcollege,1998 ) + var( bˆcollege,1998 )

. This implies that
5.48 - 5.29
t act   0.6552.
SE( bˆcollege,1998 - bˆcollege,1992 )  (0.212 + 0.202 ) 2 .
1
Thus, 0.212 + 0.202 There

is no significant change since the calculated tstatistic is less than 1.96, the 5% critical
value.
7.7. (a) The tstatistic is 0.485 / 2.61  0.186  1.96. Therefore, the coefficient on BDR is

not statistically significantly different from zero.
(b) The coefficient on BDR measures the partial effect of the number of bedrooms
holding house size (Hsize) constant. Yet, the typical 5bedroom house is much larger
than the typical
2bedroom house. Thus, the results in (a) says little about the conventional wisdom.
(c) The 99% confidence interval for effect of lot size on price is 2000  [0.002  2.58 
0.00048] or 1.52 to 6.48 (in thousands of dollars).
(d) Choosing the scale of the variables should be done to make the regression results
easy to read and to interpret. If the lot size were measured in thousands of square
feet, the estimate coefficient would be 2 instead of 0.002.
F
(e) The 10% critical value from the 2,� distribution is 2.30. Because 0.08  2.30, the
coefficients are not jointly significant at the 10% level.
7.9. (a) Estimate

Yi  b 0 + g X 1i + b 2 ( X 1i + X 2i ) + ui
and test whether g  0.
(b) Estimate
Yi  b 0 + g X 1i + b 2 ( X 2 i - aX 1i ) + ui
(c) Estimate
Yi - X 1i  b 0 + g X 1i + b 2 ( X 2 i - X 1i ) + ui
7.11. (a) Treatment (assignment to small classes) was not randomly assigned in the

population (the continuing and newlyenrolled students) because of the difference in
the proportion of treated continuing and newlyenrolled students. Thus, the treatment
indicator X1 is correlated with X2. If newlyenrolled students perform systematically
differently on standardized tests than continuing students (perhaps because of
adjustment to a new school), then this becomes part of the error term u in (a). This
leads to correlation between X and u, so that E(u|X )  0. Because E(u|X )  0, the b̂1
1 l l
is biased and inconsistent.
(b) Because treatment was randomly assigned conditional on enrollment status
(continuing or newlyenrolled), E(u | X1, X2) will not depend on X1. This means that
the assumption of conditional mean independence is satisfied, and b̂1 is unbiased and
consistent. However, because X2 was not randomly assigned (newlyenrolled
students may, on average, have attributes other than being newly enrolled that affect
test scores), E(u | X , X ) may depend of X , so that b̂ 2 may be biased and
1 2 2
inconsistent.
Chapter 8
Nonlinear Regression Functions
198 - 196
100 �  1.0204%.
8.1. (a) The percentage increase in sales is 196 The approximation
is 100  [ln (198) - ln (196)]  1.0152%.
205 - 196
100 �  4.5918%
(b) When Sales2010  205, the percentage increase is 196 and the
approximation is 100  [ln (205) - ln (196)]  4.4895%. When Sales2010  250, the percentage
250 - 196
100 �  27.551%
increase is 196 and the approximation is 100  [ln (250) - ln (196)] 
500 - 196
100 �  155.1%
24.335%. When Sales2010  500, the percentage increase is 196 and the
approximation is 100  [ln (500) - ln (196)]  93.649%.
(c) The approximation works well when the change is small. The quality of the approximation
deteriorates as the percentage change increases.
8.3. (a) The regression functions for hypothetical values of the regression coefficients that are

consistent with the educator’s statement are: b1 > 0 and b 2  0. When TestScore is plotted
against STR the regression will show three horizontal segments. The first segment will be for
values of STR  20; the next segment for 20 �STR �25; the final segment for STR > 25. The
first segment will be higher than the second, and the second segment will be higher than the
third.
(b) It happens because of perfect multicollinearity. With all three class size binary variables
included in the regression, it is impossible to compute the OLS estimates because the intercept
is a perfect linear function of the three class size regressors.
8.5. (a) (1) The demand for older journals is less elastic than for younger journals because the

interaction term between the log of journal age and price per citation is positive. (2) There
is a linear relationship between log price and log of quantity follows because the estimated
coefficients on log price squared and log price cubed are both insignificant. (3) The demand
is greater for journals with more characters follows from the positive and statistically
significant coefficient estimate on the log of characters.
30 Stock/Watson Introduction to Econometrics Third Edition
(b) (i) The effect of ln(Price per citation) is given by [-0.899 + 0.141  ln(Age)] 
ln(Price per citation). Using Age  80, the elasticity is [-0.899 + 0.141  ln(80)]
 -0.28.
(ii) As described in equation (8.8) and the footnote on page 261, the standard error can
be found by dividing 0.28, the absolute value of the estimate, by the square root of
the
Fstatistic testing bln(Price per citation) + ln(80)  bln(Age)×ln(Price per citation)  0.
�Characters �
ln � � ln(Characters ) - ln(a)
(c) � a � for any constant a. Thus, estimated
parameter on Characters will not change and the constant (intercept) will change.
8.7. (a) (i) ln(Earnings) for females are, on average, 0.44 lower for men than for women.

(ii) The error term has a standard deviation of 2.65 (measured in logpoints).
(iii) Yes. However the regression does not control for many factors (size of firm,
industry, profitability, experience and so forth).
(iv) No. In isolation, these results do not imply gender discrimination. Gender
discrimination means that two workers, identical in every way but gender, are paid
different wages. Thus, it is also important to control for characteristics of the
workers that may affect their productivity (education, years of experience, etc.) If
these characteristics are systematically different between men and women, then they
may be responsible for the difference in mean wages. (If this were true, it would
raise an interesting and important question of why women tend to have less
education or less experience than men, but that is a question about something other
than gender discrimination in top corporate jobs.) These are potentially important
omitted variables in the regression that will lead to bias in the OLS coefficient
estimator for Female. Since these characteristics were not controlled for in the
statistical analysis, it is premature to reach a conclusion about gender
discrimination.
(b) (i) If MarketValue increases by 1%, earnings increase by 0.37%
(ii) Female is correlated with the two new included variables and at least one of the
variables is important for explaining ln(Earnings). Thus the regression in part (a)
suffered from omitted variable bias.
(c) Forgetting about the effect or Return, whose effects seems small and statistically
insignificant, the omitted variable bias formula (see equation (6.1)) suggests that
Female is negatively correlated with ln(MarketValue).
8.9. Note that
Y  b 0 + b1 X + b 2 X 2
 b 0 + (b1 + 21b 2 ) X + b 2 ( X 2 - 21X ).
Define a new independent variable Z  X - 21X , and estimate

2
Y  b 0 + g X + b 2 Z + ui .
gˆ �1.96 �SE ( gˆ ) .
The confidence interval is
dE (Y | X )
 b1
8.11. Linear model: E(Y | X)  b0 + b1X, so that dX and the elasticity is
X b1 X
b1 
E (Y | X ) b 0 + b1 X
LogLog Model: E(Y | X) 
( )
E e b0 + b1 ln( X ) + u | X  e b0 + b1 ln( X ) E (eu | X )  ce b0 + b1 ln( X )
, where c

E(eu | X), which does not depend on X because u and X are assumed to be independent.
dE (Y | X ) b1 b0 + b1 ln( X ) E (Y | X )
 ce  b1
Thus dX X X , and the elasticity is b1.
Chapter 9
Assessing Studies Based on
Multiple Regression
9.1. As explained in the text, potential threats to external validity arise from differences between the
population and setting studied and the population and setting of interest. The statistical results
based on New York in the 1970s are likely to apply to Boston in the 1970s but not to Los Angeles
in the 1970s. In 1970, New York and Boston had large and widely used public transportation
systems. Attitudes about smoking were roughly the same in New York and Boston in the 1970s. In
contrast, Los Angeles had a considerably smaller public transportation system in 1970. Most
residents of Los Angeles relied on their cars to commute to work, school, and so forth. The results
from New York in the 1970s are unlikely to apply to New York in 2010. Attitudes towards
smoking changed significantly from 1970 to 2010.
9.3. The key is that the selected sample contains only employed women. Consider two women, Beth
and Julie. Beth has no children; Julie has one child. Beth and Julie are otherwise identical. Both
can earn $25,000 per year in the labor market. Each must compare the $25,000 benefit to the costs
of working. For Beth, the cost of working is forgone leisure. For Julie, it is forgone leisure and the
costs (pecuniary and other) of child care. If Beth is just on the margin between working in the
labor market or not, then Julie, who has a higher opportunity cost, will decide not to work in the
labor market. Instead, Julie will work in “home production,” caring for children, and so forth.
Thus, on average, women with children who decide to work are women who earn higher wages in
the labor market.
g 1b 0 - g 0 b1 g 1u - b1v
Q + .
9.5. (a) g 1 - b1 g 1 - b1
b0 - g 0 u -v
P + .
and g 1 - b1 g 1 - b1
g 1b 0 - g 0 b1 b -g0
E (Q )  , E ( P)  0
(b) g 1 - b1 g 1 - b1
2
� 1 � 2 2
var(Q)  � �(g 1 s u + b1 s v ), var( P)
2 2
�g 1 - b1 �
2
� 1 � 2
� �(s u + s v ),
2
g
�1 - b1 �
(c)
and
2
� 1 �
cov( P, Q)  � �(g 1s u + b1s V )
2 2
g
�1 - b1 �
p cov(Q, P ) g s + b1s v 2 2
cov( P, Q)
bˆ1 �  1 u2 , bˆ0 �
p
E (Q ) - E ( P )
(d) (i) var( P) s u + s v2 var( P)
p
s 2 (g - b )
bˆ1 - b1 � u 2 1 2 1 > 0,
(ii) su +sv using the fact that g1 > 0 (supply curves slope up) and b1  0
(demand curves slope down).
9.7. (a) True. Correlation between regressors and error terms means that the OLS estimator is

inconsistent.
(b) True.
9.9. Both regressions suffer from omitted variable bias so that they will not provide reliable estimates
of the causal effect of income on test scores. However, the nonlinear regression in (8.18) fits the
data well, so that it could be used for forecasting.
9.11. Again, there are reasons for concern. Here are a few.
Internal consistency: To the extent that price is affected by demand, there may be simultaneous
equation bias.
External consistency: The internet and introduction of “Ejournals” may induce important changes in
the market for academic journals so that the results for 2000 may not be relevant for today’s market.
� ( X% %
300
i - X )(Yi - Y )
bˆ1  i 1
� ( X% %2
300
i - X)
9.13. (a) i 1 . Because all of the Xi’s are used (although some are used for
the wrong values of Yj), X% X , and �i 1

n
( X i - X )2
. Also, Yi - Y  b1 ( X i - X ) + ui - u .
Using these expressions:
� � ( X% � ( X%- X )(u - u )
0.8 n n n
( X i - X )2 i - X )( X i - X )
bˆ1  b1 in1
i i
+ b1 i  0.8 n +1
+ i 1
� � � (X - X )
n n
i 1
(Xi - X ) 2
i 1
(Xi - X ) 2
i 1 i
2
1 0.8n 1 n 1 n %
�i 1
( X i - X )2 �i  0.8 n +1
( X% i - X )( X i - X ) �i 1 ( X i - X )(ui - u )
 b1 n + b1 n +n
1 n 1 n 1 n
n
� i 1
( X i - X )2
n
� i 1
( X i - X )2 � ( X i - X )2
n i 1
where n  300, and the last equality uses an ordering of the observations so that the first
%
240 observations ( 0.8  n) correspond to the correctly measured observations ( X i  Xi).
As is done elsewhere in the book, we interpret n  300 as a large sample, so we use the
approximation of n tending to infinity. The solution provided here thus shows that these
expressions are approximately true for n large and hold in the limit that n tends to infinity.
Each of the averages in the expression for b̂1 have the following probability limits:
1 n p
n
�i 1
( X i - X ) 2
� s X2
,
1 0.8 n p
� i
n i 1
( X - X ) 2
� 0.8s X2
,
1 n % p
�
n i 1
( X i - X )(u i - u ) � 0
, and
1 n p
�i  0.8 n +1
( X%i - X )( X i - X ) � 0
n ,
%
where the last result follows because X i  Xi for the scrambled observations and Xj is
p
ˆ
independent of Xi for i  j. Taken together, these results imply b1 � 0.8b1 .
p p
ˆ ˆ
(b) Because b1 � 0.8b1 , b1 / 0.8 � b1 , so a consistent estimator of b1 is the OLS estimator
divided by 0.8.
(c) Yes, the estimator based on the first 240 observations is better than the adjusted estimator
from part (b). Equation (4.21) in Key Concept 4.4 (page 129) implies that the estimator based
on the first 240 observations has a variance that is
1 var [ ( X i - m X )ui ]
var( bˆ1 (240obs )) 
[ var( X i )]
2
240
.
From part (a), the OLS estimator based on all of the observations has two sources of sampling
� ( X%- X )(u - u )
300
i 1 i i
�
300
( X i - X )2
error. The first is i 1 which is the usual source that comes from the
� ( X%- X )( X - X )
300
i i
b1 i  241
�i1 ( X i - X )2 , which is the source that comes
300
omitted factors (u). The second is
from scrambling the data. These two terms are uncorrelated in large samples, and their
respective largesample variances are:
��300 ( X% i - X )(ui - u )
� 1 var [ ( X - m )u ]
var � i 1 300 � i X i
� � ( X i - X )2 [ var( X i )]
2
� 300
� i 1 �
and
� �300 ( X%i - X )( X i - X ) � 0.2

var �b1 i  241 300 � b12
�
� �i 1 ( X i - X ) 2 �
�
300
.
Thus
�bˆ1 (300obs) � 1 �1 var [ ( X i - m X )ui ] 2 0.2

�
var �
� 0.8 � �
� 0.64 � + b �
[ var( X i ) ]
2 1
� � 300
� 300 �
�
which is larger than the variance of the estimator that only uses the first 240 observations.
Thus
�bˆ (300obs ) � 1 �1 var [ ( X i - m X )ui ] 0.2 �

var � 1 � � + b12 �
� 0.8 � 0.64 �
[ ]
2
� � 300 var( X ) 300 �
� i �
which is larger than the variance of the estimator that only uses the first 240 observations.
Chapter 10
Regression with Panel Data
10.1. (a) With a $1 increase in the beer tax, the expected number of lives that would be saved is

0.45 per 10,000 people. Since New Jersey has a population of 8.1 million, the expected
number of lives saved is 0.45  810  364.5. The 95% confidence interval is (0.45  1.96 
0.22)  810  [15.228, 713.77].
(b) When New Jersey lowers its drinking age from 21 to 18, the expected fatality rate increases by
0.028 deaths per 10,000. The 95% confidence interval for the change in death rate is 0.028 
1.96  0.066  [- 0.1014, 0.1574]. With a population of 8.1 million, the number of fatalities
will increase by 0.028  810  22.68 with a 95% confidence interval [-0.1014, 0.1574]  810
 [-82.134, 127.49].
(c) When real income per capita in New Jersey increases by 1%, the expected fatality rate
increases by 1.81 deaths per 10,000. The 90% confidence interval for the change in death rate
is 1.81  1.64  0.47  [1.04, 2.58]. With a population of 8.1 million, the number of fatalities
will increase by 1.81  810  1466.1 with a 90% confidence interval [1.04, 2.58]  810 
[840, 2092].
(d) The low pvalue (or high Fstatistic) associated with the Ftest on the assumption that time
effects are zero suggests that the time effects should be included in the regression.
(e) Define a binary variable west which equals 1 for the western states and 0 for the other states.
Include the interaction term between the binary variable west and the unemployment rate,
west  (unemployment rate), in the regression equation corresponding to column (4). Suppose
the coefficient associated with unemployment rate is b and the coefficient associated with
west (unemployment rate) is g. Then b captures the effect of the unemployment rate in the
eastern states, and b + b captures the effect of the unemployment rate in the western states.
The difference in the effect of the unemployment rate in the western and eastern states is b.
Using the coefficient estimate (g ) and the standard error SE(g ), you can calculate the t
ˆ ˆ
statistic to test whether g is statistically significant at a given significance level.
10.3. The five potential threats to the internal validity of a regression study are: omitted variables,
misspecification of the functional form, imprecise measurement of the independent variables,
sample selection, and simultaneous causality. You should think about these threats onebyone.
Are there important omitted variables that affect traffic fatalities and that may be correlated with
the other variables included in the regression? The most obvious candidates are the safety of roads,
weather, and so forth. These variables are essentially constant over the sample period, so their
effect is captured by the state fixed effects. You may think of something that we missed. Since
most of the variables are binary variables, the largest functional form choice involves the Beer Tax
variable. A linear specification is used in the text, which seems generally consistent with the data
in Figure 8.2. To check the reliability of the linear specification, it would be useful to consider a
log specification or a quadratic. Measurement error does not appear to a problem, as variables like
traffic fatalities and taxes are accurately measured. Similarly, sample selection is a not a problem
because data were used from all of the states. Simultaneous causality could be a potential problem.
That is, states with high fatality rates might decide to increase taxes to reduce consumption. Expert
knowledge is required to determine if this is a problem.
10.5. Let D2i  1 if i  2 and 0 otherwise; D3i  1 if i  3 and 0 otherwise … Dni  1 if i  n and 0
otherwise. Let B2t  1 if t  2 and 0 otherwise; B3t  1 if t  3 and 0 otherwise … BTt  1 if t  T
and 0 otherwise. Let b0  1 + 1; gi   i - 1 and t   t - b1.
10.7. (a) Average snow fall does not vary over time, and thus will be perfectly collinear with the

state fixed effect.
(b) Snowit does vary with time, and so this method can be used along with state fixed effects.
s u2
ˆ  � Yit
1 T .
10.9. (a) i T t 1 which has variance T Because T is not growing, the variance is not
getting small.  i is not consistent.
ˆ
(b) The average in (a) is computed over T observations. In this case T is small (T  4), so the
normal approximation from the CLT is not likely to be very good.
10.11 Using the hint, equation (10.22) can be written as
�1 1 �
� � ( X i 2 - X i1 ) ( Yi 2 - Yi1 ) + ( X i 2 - X i1 ) ( Yi 2 - Yi1 ) �
n
i 1
bˆ1DM  �4 4 �
n � 1 1 2 �
�i 1 � ( X i 2 - X i1 ) + ( X i 2 - X i 1 ) �
2
�4 4 �
� ( X - X ) ( Y - Y )  bˆ
n
i2 i1 i2 i1
 i 1 BA
� (X -X )
n 2 1
i 1 i2 i1
Chapter 11
Regression with a Binary
Dependent Variable
11.1. (a) The tstatistic for the coefficient on Experience is 0.031/0.009  3.44, which is significant

at the 1% level.
(b) zMatthew  0.712 + 0.031 �10  1.022; F (1.022)  0.847
z  0.712 + 0.031 �0  0.712; F(0.712)  0.762
(c) Christopher
(d) z Jed  0.712 + 0.031 �80  3.192; F (3.192)  0.999, this is unlikely to be accurate because the
sample did not include anyone with more that 40 years of driving experience.
11.3. (a) The tstatistic for the coefficient on Experience is t  0.006/0.002  3, which is significant

a the 1% level.
ProbMatther  0.774 + 0.006  10  0.836
ProbChristopher  0.774 + 0.006  0  0.774
(b)
The probabilities are similar except when experience in large ( >40 years). In this case the
LPM model produces nonsensical results (probabilities greater than 1.0).
11.5. (a) F(0.806 + 0.041  10  0.174  1 - 0.015  1  10)  0.814

(b) F(0.806 + 0.041  2 - 0.174  0 - 0.015  0  2)  0.813
(c) The tstat on the interaction term is -0.015/0.019  -0.79, which is not significant at the 10%
level.
11.7. (a) For a black applicant having a P/I ratio of 0.35, the probability that the application will be

1
F ( -4.13 + 5.37 �0.35 +1.27)   27.28%.
denied is 1 + e0.9805
(b) With the P/I ratio reduced to 0.30, the probability of being denied is
1
F (-4.13 + 5.37 �0.30 + 1.27)   22.29%
1 + e1.249 . The difference in denial probabilities
compared to (a) is 4.99 percentage points lower.
(c) For a white applicant having a P/I ratio of 0.35, the probability that the application will be
1
F ( -4.13 + 5.37 �0.35)   9.53%.
denied is 1 + e 2.2505 If the P/I ratio is reduced to 0.30, the
1
F ( -4.13 + 5.37 �0.30)   7.45%.
probability of being denied is 1 + e 2.519 The difference in
denial probabilities is 2.08 percentage points lower.
(d) From the results in parts (a)–(c), we can see that the marginal effect of the P/I ratio on the
probability of mortgage denial depends on race. In the logit regression functional form,
the marginal effect depends on the level of probability which in turn depends on the race
of the applicant. The coefficient on black is statistically significant at the 1% level. The logit
and probit results are similar.
11.9. (a) The coefficient on black is 0.084, indicating an estimated denial probability that is

8.4 percentage points higher for the black applicant.
(b) The 95% confidence interval is 0.084  1.96  0.023  [3.89%, 12.91%].
(c) The answer in (a) will be biased if there are omitted variables which are racerelated and have
impacts on mortgage denial. Such variables would have to be related with race and also be
related with the probability of default on the mortgage (which in turn would lead to denial of
the mortgage application). Standard measures of default probability (past credit history and
employment variables) are included in the regressions shown in Table 9.2, so these omitted
variables are unlikely to bias the answer in (a). Other variables such as education, marital
status, and occupation may also be related the probability of default, and these variables are
omitted from the regression in column. Adding these variables (see columns (4)–(6)) have
little effect on the estimated effect of black on the probability of mortgage denial.
11.11. (a) This is a censored or truncated regression model (note the dependent variable might be

zero).
(b) This is an ordered response model.
(c) This is the discrete choice (or multiple choice) model.
(d) This is a model with count data.
Chapter 12
Instrumental Variables Regression
ln( Pi ,cigarettes ) - ln( Pi ,cigarettes ),

12.1. (a) The change in the regressor, 1995 1985
from a $0.50 per pack increase in
the retail price is ln(8.00) - ln(7.50)  0.0645. The expected percentage change in cigarette
demand is -0.94 0.0645  100%  - .07%. The 95% confidence interval is (- 0.94  1.96 
0.21)  0.0645  100%  [- 8.72%, -3.41%].
(b) With a 2% reduction in income, the expected percentage change in cigarette demand is
0.53  (-0.02)  100%  -1.06%.
(c) The regression in column (1) will not provide a reliable answer to the question in (b) when
recessions last less than 1 year. The regression in column (1) studies the longrun price and
income elasticity. Cigarettes are addictive. The response of demand to an income decrease
will be smaller in the short run than in the long run.
(d) The instrumental variable would be too weak (irrelevant) if the Fstatistic in column (1) was
3.6 instead of 33.6, and we cannot rely on the standard methods for statistical inference. Thus
the regression would not provide a reliable answer to the question posed in (a).
sˆ 2  1 �n (Y - bˆ0TSLS - bˆ1TSLS Xˆ i ) 2
is not consistent. Write this as s a 
12.3. (a) The estimator a n - 2 i 1 i
ˆ2
�in1 (uî - bˆ1TSLS ( Xˆ i - X i ))2 , ˆ TSLS ˆ TSLS ˆ TSLS
where uî  Yi - b 0 - b1 X i . Replacing b1 with b1,
1
n-2
sˆ 2 �1 �n (u - b1 ( Xˆ i - X i )) 2  n1 �in1 ui2 +
as suggested in the question, write this as a n i 1 i
1
�in1[ b12 ( Xˆ i - X i ) 2 + 2ui b1 ( Xˆ i - X i )].
n The first term on the right hand side of the equation
converges to s u , but the second term converges to something that is nonzero. Thus s a is
ˆ2 ˆ2
not consistent.
sˆ b2  1
Sin1 (Yi - bˆ0TSLS - bˆ1TSLS X i ) 2
(b) The estimator n-2 is consistent. Using the same notation as in
sˆ � S u ,
and this estimator converges in probability to s u .
2 1 n 2 2
(a), we can write b n i 1 i
12.5. (a) Instrument relevance. Z i does not enter the population regression for X i

(b) Z is not a valid instrument. X̂ will be perfectly collinear with W. (Alternatively, the

first stage regression suffers from perfect multicollinearity.)
(c) W is perfectly collinear with the constant term.
(d) Z is not a valid instrument because it is correlated with the error term.
12.7. (a) Under the null hypothesis of instrument exogeneity, the J statistic is distributed as

a c1 random variable, with a 1% critical value of 6.63. Thus the statistic is significant,
2
and instrument exogeneity E(ui|Z1i, Z2i)  0 is rejected.
(b) The J test suggests that E(ui |Z1i, Z2i)  0, but doesn’t provide evidence about whether
the problem is with Z1 or Z2 or both.
12.9. (a) There are other factors that could affect both the choice to serve in the military

and annual earnings. One example could be education, although this could be
included in the regression as a control variable. Another variable is “ability” which is
difficult to measure, and thus difficult to control for in the regression.
(b) The draft was determined by a national lottery so the choice of serving in the military
was random. Because it was randomly selected, the lottery number is uncorrelated
with individual characteristics that may affect earning and hence the instrument is
exogenous. Because it affected the probability of serving in the military, the lottery
number is relevant.
Chapter 13
Experiments and QuasiExperiments
13.1. For students in kindergarten, the estimated small class treatment effect relative to being in a
regular class is an increase of 13.90 points on the test with a standard error 2.45. The 95%
confidence interval is 13.90  1.96  2.45  [9.098, 18.702].
For students in grade 1, the estimated small class treatment effect relative to being in a regular
class is an increase of 29.78 points on the test with a standard error 2.83. The 95% confidence
interval is 29.78  1.96  2.83  [24.233, 35.327].
interval is 19.39  1.96  2.71  [14.078, 24.702].
interval is 15.59  1.96  2.40  [10.886, 20.294].
X - X Control
13.3. (a) The estimated average treatment effect is TreatmentGroup  1241 - 1201  40
points.
(b) There would be nonrandom assignment if men (or women) had different probabilities of being
assigned to the treatment and control groups. Let pMen denote the probability that a male is
assigned to the treatment group. Random assignment means pMen  0.5. Testing this null
pˆ Men - 0.5 0.55 - 0.50
tMen    1.00,
1 1
pˆ Men (1 - pˆ Men ) 0.55(1 - 0.55)
n Men 100
hypothesis results in a tstatistic of
so that the null of random assignment cannot be rejected at the 10% level. A similar result is
found for women.
13.5. (a) This is an example of attrition, which poses a threat to internal validity. After the male

athletes leave the experiment, the remaining subjects are representative of a population that
excludes male athletes. If the average causal effect for this population is the same as the
average causal effect for the population that includes the male athletes, then the attrition does
not affect the internal validity of the experiment. On the other hand, if the average causal
effect for male athletes differs from the rest of population, internal validity has been
compromised.
(b) This is an example of partial compliance which is a threat to internal validity. The local area
network is a failure to follow treatment protocol, and this leads to bias in the OLS estimator of
the average causal effect.
(c) This poses no threat to internal validity. As stated, the study is focused on the effect of dorm
room Internet connections. The treatment is making the connections available in the room; the
treatment is not the use of the Internet. Thus, the art majors received the treatment (although
they chose not to use the Internet).
(d) As in part (b) this is an example of partial compliance. Failure to follow treatment protocol
leads to bias in the OLS estimator.
13.7. From the population regression
Yit   i + b1 X it + b 2 ( Dt �Wi ) + b 0 Dt + vit ,
we have
Yi 2 - Yi1  b1 ( X i 2 - X i1 ) + b 2 [( D2 - D1 ) �Wi ] + b 0 ( D2 - D1 ) + (vi 2 - vi1 ).
By defining DYi  Yi2 - Yi1, DXi  Xi2 - Xi1 (a binary treatment variable) and ui  vi2 - vi1, and using
D1  0 and D2  1, we can rewrite this equation as
DYi  b 0 + b1 X i + b 2Wi + ui ,
which is Equation (13.5) in the case of a single W regressor.
13.9. The covariance between b1i X i and Xi is
cov( b1i X i , X i )  E{[ b1i X i - E ( b1i X i )][ X i - E ( X i )]}
 E{b1i X i2 - E ( b1i X i ) X i - b1i X i E ( X i ) + E ( b1i X i ) E ( X i )}
 E ( b1i X i2 ) - E ( b1i X i ) E ( X i )
Because Xi is randomly assigned, Xi is distributed independently of b1i. The independence means
E ( b1i X i )  E ( b1i ) E ( X i ) and E ( b1i X i2 )  E ( b1i ) E ( X i2 ).
Thus cov( b1i X i , X i ) can be further simplified:

cov( b1i X i , X i )  E ( b1i )[ E ( X i2 ) - E 2 ( X i )]
 E ( b1i )s X2 .
So
cov( b1i X i , X i ) E ( b1i )s X2
  E ( b1i ).
s X2 s X2
13.11. Following the notation used in Chapter 13, let 1i denote the coefficient on state sales tax in the
“first stage” IV regression, and let -b1i denote cigarette demand elasticity. (In both cases, suppose
that income has been controlled for in the analysis.) From (13.11)
p
E ( b1i  1i ) cov( b1i ,  1i ) cov( b1i ,  1i )
bˆ TSLS �  E ( b1i ) +  Average Treatment Effect + ,
E ( 1i ) E ( 1i ) E ( 1i )
where the first equality uses the uses properties of covariances (equation (2.34)), and the second
equality uses the definition of the average treatment effect. Evidently, the local average treatment
effect will deviate from the average treatment effect when cov(b1i ,  1i )  0. As discussed in
Section 13.6, this covariance is zero when b1i or 1i are constant. This seems likely. But, for the
sake of argument, suppose that they are not constant; that is, suppose the demand elasticity differs
from state to state (b1i is not constant) as does the effect of sales taxes on cigarette prices ( 1i is not
constant). Are b1i and 1i related? Microeconomics suggests that they might be. Recall from your
microeconomics class that the lower is the demand elasticity, the larger fraction of a sales tax is
passed along to consumers in terms of higher prices. This suggests that b1i and 1i are positively
related, so that cov( b1i ,  1i ) > 0. Because E( ) > 0, this suggests that the local average treatment
1i
effect is greater than the average treatment effect when b1i varies from state to state.
Chapter 14
Introduction to Time Series Regression
and Forecasting
14.1. (a) Since the probability distribution of Yt is the same as the probability distribution of Yt–1

(this is the definition of stationarity), the means (and all other moments) are the same.
(b) E(Yt)  b0 + b1E(Yt–1) + E(ut), but E(ut)  0 and E(Yt)  E(Yt–1). Thus E(Yt)  b0 + b1E(Yt), and
solving for E(Yt) yields the result.
14.3. (a) To test for a stochastic trend (unit root) in ln(IP), the ADF statistic is the tstatistic testing

the hypothesis that the coefficient on ln(IPt – 1) is zero versus the alternative hypothesis that the
-0.018
t  -2.5714.
coefficient on ln(IPt – 1) is less than zero. The calculated tstatistic is 0.007
From Table 14.4, the 10% critical value with a time trend is -3.12. Because -2.5714 > -3.12,
the test does not reject the null hypothesis that ln(IP) has a unit autoregressive root at the 10%
significance level. That is, the test does not reject the null hypothesis that ln(IP) contains a
stochastic trend, against the alternative that it is stationary.
(b) The ADF test supports the specification used in Exercise 14.2. The use of first differences in
Exercise 14.2 eliminates random walk trend in ln(IP).
E[(W - c ) 2 ]  E{[W - mW ) + ( mW - c)]2 }

 E[(W - mW ) 2 ] + 2 E (W - mW )( mW - c) + ( mW - c) 2
 s W + ( mW - c) .
2 2
14.5. (a)
(b) Using the result in part (a), the conditional mean squared error
E[(Yt - ft -1 )2 |Yt -1 , Yt - 2 ,...]  s t2|t -1 + (Yt |t -1 - ft -1 )2
s t2|t -1  E[(Yt - Yt |t -1 ) 2 ].
with the conditional variance This equation is minimized when the
f Y .
second term equals zero, or when t -1 t|t -1 (An alternative is to use the hint, and notice that
the result follows immediately from exercise 2.27.)
(c) Applying Equation (2.27), we know the error ut is uncorrelated with ut – 1 if E(ut |ut – 1)  0.
From Equation (14.14) for the AR(p) process, we have
ut -1  Yt -1 - b 0 - b1Yt - 2 - b 2Yt -3 - L - b pYt - p -1  f (Yt -1 , Yt - 2 ,..., Yt - p -1 ),
a function of Yt – 1 and its lagged values. The assumption E (ut |Yt -1 , Yt -2 ,...)  0 means that

conditional on Yt – 1 and its lagged values, or any functions of Yt – 1 and its lagged values, ut has
mean zero. That is,
E (ut | ut -1 )  E[ut | f (Yt -1 , Yt - 2 ,..., Yt - p - 2 )]  0.
Thus ut and ut – 1 are uncorrelated. A similar argument shows that ut and ut – j are uncorrelated
for all j  1. Thus ut is serially uncorrelated.
14.7. (a) From Exercise (14.1) E(Yt)  2.5 + 0.7E(Yt – 1) + E(ut), but E(Yt)  E(Yt – 1) (stationarity) and

E(ut)  0, so that E(Yt)  2.5/(1 - 0.7). Also, because Yt  2.5 + 0.7Yt – 1 + ut, var(Yt) 
0.72var(Yt – 1) + var(ut) +2  0.7  cov(Yt – 1, ut). But cov(Yt – 1, ut)  0 and var(Yt)  var(Yt – 1)
(stationarity), so that var(Yt)  9/(1 - 0.72)  17.647.
(b) The 1st autocovariance is
cov(Yt , Yt -1 )  cov(2.5 + 0.7Yt -1 + ut , Yt -1 )
 0.7 var(Yt -1 ) + cov(ut , Yt -1 )
 0.7s Y2
 0.7 �17.647  12.353.
The 2nd autocovariance is
cov(Yt , Yt - 2 )  cov[(1 + 0.7)2.5 + 0.72 Yt - 2 + ut + 0.7ut -1 , Yt - 2 ]
 0.72 var(Yt - 2 ) + cov(ut + 0.7ut -1 , Yt - 2 )
 0.72 s Y2
 0.72 �17.647  8.6471.
(c) The 1st autocorrelation is
cov(Yt , Yt -1 ) 0.7s Y2
corr (Yt , Yt -1 )    0.7.
var(Yt ) var(Yt -1 ) s Y2
The 2nd autocorrelation is
cov(Yt , Yt - 2 ) 0.7 2 s Y2
corr (Yt , Yt - 2 )    0.49.
var(Yt ) var(Yt - 2 ) s Y2
(d) The conditional expectation of YT +1 given YT is

YT +1/T
 2.5 + 0.7YT  2.5 + 0.7  102.3  74.11.
14.9. (a) E(Yt)  b0 + E(et) + b1E(et–1) +  + bqE(et–q)  b0 [because E(et)  0 for all values of t].
var(Yt )  var(et ) + b12 var(et -1 ) + L + bq2 var(et -q )

+2b1 cov(et , et -1 ) + L + 2bq -1bq cov(et - q +1 , et - q )
 s e2 (1 + b12 + L + bq2 )
(b)
where the final equality follows from var(et)  s e for all t and cov(et, ei)  0 for i t.
2
(c) Yt  b0 + et + b1et–1 + b2et – 2 +  + bqet – q and Yt–j  b0 + et – j + b1et – 1 – j + b2et – 2 – j + 
�q �q b b cov(et - k , et - j - m ),
+ bqet – q – j and cov(Yt, Yt – j)  k  0 m 0 k m where b0  1. Notice that
cov(et–k, et–j–m)  0 for all terms in the sum.
var(Yt )  s e2 ( 1 + b12 ) , cov(Yt , Yt - j )  s e2b1 , cov(Yt , Yt - j )  0
(d) and for j > 1.
14.11. Write the model as Yt - Yt – 1  b0 + b1(Yt – 1 - Yt – 2) + ut. Rearranging yields
Yt  b0 + (1 + b1)Yt – 1 - b1Yt – 2 + ut.
Chapter 15
Estimation of Dynamic Causal Effects
15.1. (a) See the table below. bi is the dynamic multiplier. With the 25% oil price jump, the

predicted effect on output growth for the ith quarter is 25bi percentage points.
Dynamic 95% confidence
Period ahead multiplier Predicted effect on interval 25  [b i 1.96SE
(i) (b i) output growth (25b i) (b i)]
0 - 0.055 -1.375 [-4.021, 1.271]
1 - 0.026 - 0.65 [-3.443, 2.143]

2 - 0.031 - 0.775 [-3.127, 1.577]
3 - 0.109 -2.725 [-4.783, -0.667]
4 - 0.128 -3.2 [-5.797, -0.603]
5 0.008 0.2 [-1.025, 1.425]
6 0.025 0.625 [-1.727, 2.977]
7 - 0.019 - 0.475 [-2.386, 1.436]
8 0.067 1.675 [-0.015, 0.149]
(b) The 95% confidence interval for the predicted effect on output growth for the ith quarter from
the 25% oil price jump is 25  [bi  1.96SE (bi)] percentage points. The confidence interval is
reported in the table in (a).
(c) The predicted cumulative change in GDP growth over eight quarters is
25  (-0.055 - 0.026 - 0.031 - 0.109 - 0.128 + 0.008 + 0.025 - 0.019)  -8.375%.
(d) The 1% critical value for the Ftest is 2.407. Since the HAC Fstatistic 3.49 is larger than the
critical value, we reject the null hypothesis that all the coefficients are zero at the 1% level.
15.3. The dynamic causal effects are for experiment A. The regression in exercise 15.1 does not control
for interest rates, so that interest rates are assumed to evolve in their “normal pattern” given changes
in oil prices.
15.5. Substituting
X t  D X t + X t -1
 D X t + D X t -1 + X t - 2
L L
 D X t + D X t -1 + L + D X t - p +1 + X t - p

into Equation (15.4), we have
Yt  b 0 + b1 X t + b 2 X t -1 + b3 X t - 2 + L + b r +1 X t - r + ut
 b 0 + b1 (D X t + D X t -1 + L + D X t - r +1 + X t - r )
+ b 2 ( D X t -1 + L + D X t - r +1 + X t - r )
+ L + b r (D X t - r +1 + X t - r ) + b r + 1X t - r + ut
 b 0 + b1D X t + ( b1 + b 2 ) D X t -1 + ( b1 + b 2 + b 3 )D X t - 2
+ L + ( b1 + b 2 + L + b r )D X t - r +1
+ ( b1 + b 2 + L + b r + b r +1 ) X t -r + ut .
Comparing the above equation to Equation (15.7), we see 0  b0, 1  b1, 2  b1 + b2,
3  b1 + b2+ b3,…, and r + 1  b1 + b2 ++ br + br + 1.
Write ut  �i  0 f1 ut -i
�
15.7.
i
%
(a) Because E (u% i | X t )  0 for all i and t, E(u |X )  0 for all i and t, so that X is strictly exogenous.

i t t
E (ut - j | u% )  0
(b) Because t +1
for j  0, Xt is exogenous. However E(ut+1 | u% %
t +1 )  ut +1 so that X is
t
not strictly exogenous.
15.9. (a) This follows from the material around equation (3.2).

(b) Quasidifferencing the equation yields Yt – f1Yt – 1  (1 - f1)b0 + u% t , and the GLS estimator of
1
�T (Y - f Y )
(1 - f1)b0 is the mean of Yt – f1Yt – 1  T -1 t  2 t 1 t -1 . Dividing by (1-f1) yields the GLS
estimator of b0.
(c) This is a rearrangement of the result in (b).
bˆ  1 �T Y  1 (Y + Y ) + TT-1 T1-1 �Tt -21 Yt , bˆ - bˆ0GLS  T1 (YT + Y1 ) - T1 T 1-1 �Tt -21 Yt -
(d) Write 0 T t 1 t T T 1 so that 0
1
1 1
(YT - Y1 ) 2
.
1-f T -1
and the variance is seen to be proportional to T
Chapter 16
Additional Topics in Time
Series Regression
b0
mY  E (Yt )  ,
16.1. Y follows a stationary AR(1) model, Yt  b 0 + b1Yt -1 + ut . The mean of Y is 1 - b1
t t
and E (ut |Yt )  0.

Yt , Yt + h|t  E (Yt + h |Yt , Yt -1 ,K ),
(a) The hperiod ahead forecast of is
Yt + h|t  E (Yt + h |Yt , Yt -1 ,K )
 E ( b 0 + b1Yt + h -1 + ut |Yt , Yt -1 ,K )
 b 0 + b1Yt + h -1|t
 b 0 + b1 ( b 0 + b1Yt + h - 2|t )
 (1 + b1 ) b0 + b12Yt + h - 2|t
 (1 + b1 ) b 0 + b12 ( b 0 + b1Yt + h -3|t )
 (1 + b1 + b12 ) b0 + b13Yt + h -3|t
L L
 ( 1 + b1 + L + b1h -1 ) b 0 + b1hYt
1 - b1h
 b 0 + b1hYt
1 - b1
 mY + b1h (Yt - mY ).
(b) Substituting the result from part (a) into Xt gives
� �
X t  � iYt +i|t  � i [ mY + b1i (Yt - mY )]
i 0 i 0
� �
 mY � i + (Yt - mY )�( b1 )i
i 0 i 0
m Y - mY
 Y + t .
1 -  1 - b1
ut follows the ARCH process with mean E (ut)  0 and variance s t  1.0 + 0.5ut -1.

2 2
16.3.
(a) For the specified ARCH process, ut has the conditional mean E (ut |ut -1 )  0 and the
conditional variance.
var (ut | ut -1 )  s  1.0 + 0.5ut2-1.
t
2
The unconditional mean of ut is E (ut)  0, and the unconditional variance of ut is
var (ut )  var[ E (ut |ut -1 )] + E[var (ut | ut -1 )]

 0 + 1.0 + 0.5 E (ut2-1 )
 1.0 + 0.5var (ut -1 ).
The last equation has used the fact that E (ut )  var(ut ) + E (ut )]  var(ut ), which follows

2 2
because E (ut)  0. Because of the stationarity, var(ut–1)  var(ut). Thus, var(ut)  1.0 +
0.5var(ut) which implies var(ut )  1.0 / 0.5  2.
(b) When ut -1  0.2, s t  1.0 + 0.5 �0.2  1.02. The standard deviation of ut is st  1.01. Thus

2 2
�-3 u 3 �
Pr (-3 �ut �3)  Pr � � t � �
�1.01 s t 1.01 �
 F (2.9703) - F (-2.9703)  0.9985 - 0.0015  0.9970.
When ut–1  2.0, s t  1.0 + 0.5 �2.0  3.0. The standard deviation of ut is st  1.732. Thus

2 2
� -3 u 3 �
Pr ( -3 �ut �3)  Pr � �t � �
1.732 s t 1.732 �
�
 F(1.732) - F( -1.732)  0.9584 - 0.0416  0.9168.
16.5. Because Yt  Yt - Yt -1 + Yt -1  Yt -1 + DYt ,
T T T T T
�Yt 2 �(Yt -1 + DYt ) 2  �Yt -21 + �(DYt ) 2 + 2�Yt -1DYt .

t 1 t 1 t 1 t 1 t 1
So
1 T 1 1 �T 2 T 2 T
�
�
T t 1
Yt -1DYt  � � �
T 2 �t 1
Yt - �Yt -1 - �(DYt )2 �
t 1 t 1
.
�
�Tt 1 Yt 2 - �Tt 1 Yt 2-1  ( �Tt -11 Yt 2 + YT2 ) - ( Y02 + �Tt -11 Yt 2 )  Y 2 - Y 2  Y 2

Note that T 0 T because Y  0. Thus:
0
1 T 1 1 �2 T �
�
T t 1
Yt -1 DYt  � �
T 2�
YT - �(DYt ) 2 �
t 1 �
1� �
2
�YT � 1 T
 �
� � - �(DYt ) 2 �
.
2�
� T � T t 1
� �
�
1 T
� YX
T
� Y DY
T
�t 1Yt DYt +1
bˆ   T
t 1 t t t 1 t t +1
 .
�X � ( DY ) 1 T
T 2 T 2
� ( t +1 )
2
t 1 t t 1 t +1 D Y
16.7. T t 1 Following the hint, the numerator is the same
s u2
1
�Tt 1 Yt DYt +1 �
d
( c12 - 1).
expression as (16.21) (shifted forward in time 1 period), so that T 2 The
s u2
p
1
�Tt D Yt +1 ) 2
1( �
1 T
ut2+1
denominator is T T t 1
by the law of large numbers. The result follows
directly.
16.9. (a) From the law of iterated expectations
E (ut2 )  E ( s t2 )
 E (  0 + 1ut2-1 )
  0 + 1 E ( ut2-1 )
  0 + 1 E ( ut2 )
2
where the last line uses stationarity of u. Solving for E (ut ) gives the required result.
(b) As in (a)
E (u )  E ( s
2
t t
2
)
 E (  0 + 1ut2-1 +  2ut2- 2 + L +  p ut2- p )
  0 + 1 E ( ut2-1 ) +  2 E ( ut2- 2 ) + L +  p E ( ut2- p )
  0 + 1 E ( ut2 ) +  2 E ( ut2 ) + L +  p E ( ut2 )
0
E (ut2 ) 
so that 1 - �tp1  i .
2
(c) This follows from (b) and the restriction that E (ut ) > 0.
(d) As in (a)
E (ut2 )  E ( s t2 )
  0 + 1 E ( ut2-1 ) + f1 E ( s t2-1 )
  0 + (1 + f1 ) E ( ut2-1 )
  0 + (1 + f1 ) E ( ut2 )
0

1 - 1 - f1
E ( ut2 ) > 0.
(e) This follows from (d) and the restriction that
Chapter 17
The Theory of Linear Regression
with One Regressor
17.1. (a) Suppose there are n observations. Let b1 be an arbitrary estimator of b1. Given the

estimator b1, the sum of squared errors for the given regression model is
n
�(Y - b X ) .
i 1
i 1 i
2
bˆ1RLS , the restricted least squares estimator of b , minimizes the sum of squared errors. That

1
ˆ RLS
is, b1 satisfies the first order condition for the minimization which requires the differential
of the sum of squared errors with respect to b1 equals zero:
�2(Y - b X )(- X )  0.
i 1
i 1 i i
Solving for b1 from the first order condition leads to the restricted least squares estimator
�n X Y
bˆ1RLS  i n1 i 2 i .
�i 1 X i
(b) We show first that bˆ1RLS is unbiased. We can represent the restricted least squares estimator

bˆ1 in terms of the regressors and errors:
RLS
�n X Y �n X ( b X + ui ) �n X u
bˆ1RLS  i n1 i 2 i  i 1 i n 1 2i  b1 + i n1 i 2 i .
�i 1 X i �i 1 X i �i 1 X i
Thus
��n X u � ��in1 X i E (ui | X 1,K , X n ) �

E ( bˆ1RLS )  b1 + E � i n1 i 2 i 
� 1b + E � � b1 ,
��i 1 X i � � �in1 X i2 �
where the second equality follows by using the law of iterated expectations, and the third
equality follows from
n
� X i E (ui | X 1 ,K , X n )
i 1
0
�in1 X i2
because the observations are i.i.d. and E(ui |Xi)  0. (Note, E(ui |X1,…, Xn)  E(ui |Xi) because

the observations are i.i.d.
ˆ RLS
Under assumptions 1-3 of Key Concept 17.1, b1 is asymptotically normally distributed.
ˆ RLS
The large sample normal approximation to the limiting distribution of b1 follows from
considering
�n X u 1
�n X u
bˆ1RLS - b1  i n1 i 2 i  n1 i n1 i 2 i .
�i 1 X i n �i 1 X i
Consider first the numerator which is the sample average of vi  Xiui. By assumption 1 of Key
Concept 17.1, v has mean zero: E ( X i ui )  E[ X i E (ui | X i )]  0. By assumption 2, v is i.i.d. By
i i
v  1n �in1 X i ui , then s v2  s v2 /n.

assumption 3, var(vi) is finite. Let Using the central limit
theorem, the sample average
1 n
v /s v 
sv n
�v i 1
i �
d
N (0, 1)
or
1 n
�
n i 1
X i ui �
d
N (0, s v2 ).
2
For the denominator, X i is i.i.d. with finite second variance (because X has a finite fourth
moment), so that by the law of large numbers
1 n 2 p
�X i � E ( X 2 ).
n i 1
Combining the results on the numerator and the denominator and applying Slutsky’s theorem
lead to
1
�in1 X i ui � var( X i ui ) �
n ( bˆ1RLS - b u )  n
n 2
�
d
N�
0, 2
.
�
1
n � Xi 1 i � E( X ) �
ˆ RLS
(c) b1 is a linear estimator:
�n X Y Xi
bˆ1RLS  i n1 i 2 i  �i 1 aiYi ,
n
where ai  .
�i 1 X i � X i2
n
i 1
The weight ai (i  1,, n) depends on X1,, Xn but not on Y1,, Yn.
Thus
�n X u
bˆ1RLS  b1 + i n1 i 2 i .
�i 1 X i
bˆ1RLS is conditionally unbiased because
ˆ � �in1 X iui �
E ( b1 | X 1 ,K , X n  E �b1 + n
RLS
2
| X 1 ,K , X n �
� �i 1 X i �
��n X u �
 b1 + E � i n1 i 2 i | X 1 ,K , X n � b1.
��i 1 X i �
The final equality used the fact that
��n X u � �n X E (u | X ,K , X n )
E � i n1 i 2 i | X 1 ,K , X n � i 1 i n i 12 0
��i 1 X i � �i 1 X i
because the observations are i.i.d. and E (ui |Xi)  0.
ˆ RLS
(d) The conditional variance of b1 , given X1,, Xn, is
� �in1 X i ui �
var( b�
1
RLS
| X 1,K , X n )  var �b1 + n 2 | X1 ,K , X n �
� �i 1 Xi �
�in1 X i2 var(ui | X1 ,K , X n )

(�in1 Xi2 )2
�in1 X i2s u2

( �in1 Xi2 )2
s u2
 .
�in1 X i2
(e) The conditional variance of the OLS estimator b̂1 is
s u2
var(b�
1 |X1 ,K , X n )  .
�in1 ( X i - X )2
Since
n n n n n
�( X i - X )2  �X i2 - 2 X �X i + nX 2  �X i2 - nX 2  �X i2 ,
i 1 i 1 i 1 i 1 i 1
ˆ RLS
the OLS estimator has a larger conditional variance: var( b1|X 1 ,K , X n ) > var( b1 |X 1 ,K , X n ).
ˆ RLS
The restricted least squares estimator b1 is more efficient.
ˆ RLS
(f) Under assumption 5 of Key Concept 17.1, conditional on X1,, Xn, b1 is normally
distributed since it is a weighted average of normally distributed variables ui:
�n X u
bˆ1RLS  b1 + i n1 i 2 i .
�i 1 X i
ˆ RLS
Using the conditional mean and conditional variance of b1 derived in parts (c) and (d)
ˆ RLS
respectively, the sampling distribution of b1 , conditional on X ,, X , is 1 n
� s2 �
bˆ1RLS ~ N �b1 , n u 2 �
.
� �i 1 X i �
(g) The estimator
�in1 Yi �in1 ( b1 X i + ui ) �in1 ui

b%
1    b1 +
�in1 X i �in1 X i �in1 X i
The conditional variance is
� �n u �
var( b%
1 | X 1 ,K , X n )  var �b1 + ni 1 i | X 1 ,K , X n �
� �i 1 X i �
n
� var(ui | X 1 ,K , X n )
 i 1
(�in1 X i ) 2
ns u2
 .
(�in1 X i )2
% ˆ RLS
The difference in the conditional variance of b1 and b1 is
ns u2 s u2
var( b% ˆ RLS | X ,K , X ) 
1 | X 1 ,K , X n ) - var( b1 1 n - .
( �in1 X i ) 2 �in1 X i2
% ˆ RLS
In order to prove var( b1 | X 1 ,K , X n ) �var( b1 | X 1 ,K , X n ), we need to show
n 1
n 2
� n
(� X i )
i 1 �i 1 X i2
or equivalently
2
n
�n �
n�X �� 2
X i �.
i
i 1 �i 1 �
This inequality comes directly by applying the CauchySchwartz inequality
2
�n � n n
��
�i 1
(ai �‫ף‬
bi ) �
�
�ai2
i 1
�b
i 1
i
2
which implies
2 2
�n � �n � n n n
�� X �
�i 1 � �i 1
�
i � �‫ף‬ 1 X i �
�
�12
i 1
�X i2
i 1
n�X i2 .
i 1
% ˆ RLS
That is nSi 1 X i �(S x 1 X i ) , or var( b1| X 1 ,K , X n ) �var( b1 | X 1 ,K , X n ).
n 2 n 2
%
Note: because b1 is linear and conditionally unbiased, the result
var( b% ˆ RLS | X ,K , X )
1 | X 1 ,K , X n ) �var( b1 1 n follows directly from the GaussMarkov theorem.
17.3. (a) Using Equation (17.19), we have
n �i 1 ( X i - X )ui
1 n
n ( b�
1 - b1 )  n 1
n
�in1 ( Xi - X )2
1
�in1[( Xi - m X ) - ( X - m X )]ui
 n n
n �i 1 ( X i - X )
1 n 2
1
n �in1 ( X i - m X )ui ( X - mX ) 1
n �in1 ui
 -
1
n �in1 ( X i - X )2 1
n �in1 ( X i - X )2
1
n �in1 vi ( X - mX ) 1
n �in1 ui
 -
1
n �in1 ( X i - X )2 1
n �in1 ( X i - X )2
by defining vi  (Xi - mX)ui.
(b) The random variables u1,, un are i.i.d. with mean mu  0 and variance 0  s u  �. By the

2
central limit theorem,
n ( u - mu ) 1
�in1 ui
 n d
� N (0, 1).
su su
X � m X 2 , or X - m X � 0.
p p
The law of large numbers implies By the consistency of sample
S (X - X )
1 n 2
variance, n i 1 i converges in probability to population variance, var(Xi), which is
finite and nonzero. The result then follows from Slutsky’s theorem.
(c) The random variable vi  (Xi - mX) ui has finite variance:
var(vi )  var[( X i - m X ) mi ]
�E[( X i - m X ) 2 ui2 ]
� E[( X i - m X ) 4 ]E[(ui ) 4 ]  �.
The inequality follows by applying the CauchySchwartz inequality, and the second inequality
follows because of the finite fourth moments for (Xi, ui). The finite variance along with the fact
that vi has mean zero (by assumption 1 of Key Concept 15.1) and vi is i.i.d. (by assumption 2)
implies that the sample average v satisfies the requirements of the central limit theorem. Thus,
v 1
�in1 vi
 n
sv sv
satisfies the central limit theorem.
(d) Applying the central limit theorem, we have
1
n �in1 vi
�
d
N (0, 1).
sv
Because the sample variance is a consistent estimator of the population variance, we have
1
�in1 ( X i - X ) 2 p
n
� 1.
var( X i )
Using Slutsky’s theorem,
�in1 vt
1
n
sv
�
d
N (0,1),
i 1 ( X t - X )
n 2
n�
1
s X2
or equivalently
1
n �in1 vi
� var(vi ) �
�
d
N�
0, .
2 �
1
n � (Xi - X )
n
i 1
2
� [var( X i )] �
Thus
1
�in1 vi ( X - mX ) 1
�in1 ui
n ( bˆ1 - b1 )  n
- n
1
n �in1 ( X i - X ) 2 1
n �in1 ( X i - X ) 2
� var(vi ) �
�
d
N�
0, 2 �
� [var( X i )] �
ˆ
since the second term for n ( b1 - b1 ) converges in probability to zero as shown in part (b).
17.5. Because E(W 4)  [E(W2)]2 + var(W2), [E(W2)]2  E (W 4)  . Thus E(W2) < .
17.7. (a) The joint probability distribution function of ui, uj, Xi, Xj is f (ui, uj, Xi, Xj). The conditional

probability distribution function of ui and Xi given uj and Xj is f (ui, Xi |uj, Xj). Since ui, Xi, i 
1,, n are i.i.d., f (ui, Xi |uj, Xj)  f (ui, Xi). By definition of the conditional probability
distribution function, we have
f (ui , u j , X i , X j )  f (ui , X i | u j , X j ) f (u j , X j )
 f (ui , X i ) f (u j , X j ).
(b) The conditional probability distribution function of ui and uj given Xi and Xj equals
f (ui , u j , X i , X j ) f (ui , X i ) f (u j , X j )
f (ui , u j | X i , X j )    f (ui | X i ) f (u j | X j ).
f (Xi , X j ) f (Xi ) f (X j )
The first and third equalities used the definition of the conditional probability distribution
function. The second equality used the conclusion the from part (a) and the independence
between Xi and Xj. Substituting
f (ui , u j | Xi , X j )  f (ui | Xi ) f (u j | X j )
into the definition of the conditional expectation, we have
E (ui u j | X i , X j )  �
�ui u j f (ui , u j | X i , X j ) dui du j
�
�ui u j f (ui | X i ) f (u j |X j )dui du j
�
ui f (ui | X i )dui �
u j f (u j | X j ) du j
 E (ui | X i ) E (u j | X j ).
(c) Let Q  (X1, X2,, Xi – 1, Xi + 1,, Xn), so that f (ui|X1,, Xn)  f (ui |Xi, Q). Write
f (ui , X i , Q)
f (ui | X i , Q) 
f ( X i , Q)
f (ui , X i ) f (Q )

f ( X i ) f (Q)
f (ui , X i )

f (Xi )
 f (ui | X i )
where the first equality uses the definition of the conditional density, the second uses the fact
that (ui, Xi) and Q are independent, and the final equality uses the definition of the conditional
density. The result then follows directly.
(d) An argument like that used in (c) implies
f (ui u j | X i , K X n )  f (ui u j | X i , X j )
and the result then follows from part (b).
17.9. We need to prove
1 n
�
p
[( X i - X )2 uî2 - ( X i - m X )2 ui2 ] � 0.
n i 1
Using the identity X  m X + ( X - m X ),
n n
1 2 1 1 n
� i
n i 1
[( X - X ) 2 2
ˆ
ui - ( X i - m X ) 2 2
u i ]  ( X - m X ) �i
n i 1
ˆ
u 2
- 2( X - m X ) �( X i - m X )uî2
n i 1
1 n
+ �( X i - m X )2 (uî2 - ui2 ).
n i 1
The definition of uî implies
uî2  ui2 + ( bˆ0 - b 0 ) 2 + ( bˆ1 - b1 ) 2 X i2 - 2ui ( bˆ0 - b0 )

- 2ui ( bˆ1 - b1 ) X i + 2( bˆ0 - b 0 )( bˆ1 - b1 ) X i .
1
Sin1[( X i - X )2 uî2 - ( X i - m X ) 2 ui2 ]
Substituting this into the expression for n yields a series of terms
p
b  S X u n r s
each of which can be written as anbn where an � 0 and n
1
where r and s are
n i 1 i i
ˆ
integers. For example, an  ( X - m X ), an  ( b1 - b1 ) and so forth. The result then follows from
p
Sin1 X ir uis � d
where d is a finite constant. Let wi  X i ui and note that wi
1 r s
Slutksy’s theorem if n
is i.i.d. The law of large numbers can then be used for the desired result if E ( wi )  �. There are
2
two cases that need to be addressed. In the first, both r and s are nonzero. In this case write
E ( wi2 )  E ( X i2 r ui2 s )  [ E ( X i4r )][ E (ui4 s )]
and this term is finite if r and s are less than 2. Inspection of the terms shows that this is true. In
the second case, either r  0 or s  0. In this case the result follows directly if the nonzero
exponent (r or s) is less than 4. Inspection of the terms shows that this is true.
17.11. Note: in early printing of the third edition there was a typographical error in the expression for mY|X.

m  mY + (s XY / s X2 )( x - m X )
The correct expression is Y | X .
(a) Using the hint and equation (17.38)
1
fY | X  x ( y ) 
s Y2 (1 - r XY
2
)
� 1 � 2
�x - m X � �y - mY � �y - mY �� 1 �x - m X ��
�x - m X �
2 2
�exp � �
� �- 2 r XY � �
� �+ � �� + � ��.
�-2(1 - r XY
2
)�
� s � � s �
� s � � s � � 2 � s � �
� � X X Y Y � X
�
Simplifying yields the desired expression.
(b) The result follows by noting that fY|X=x(y) is a normal density (see equation (17.36)) with m  mT|
s Y2|X
X and s  .
2
(c) Let b  sXY/ s X and a  mY −bmX.

2
17.13 (a) The answer is provided by equation (13.10) and the discussion following the equation.

The result was also shown in Exercise 13.10, and the approach used in the exercise is
discussed in part (b).
(b) Write the regression model as Yi  b0 + b1Xi + vi, where b0  E(b0i), b1  E(b1i), and vi  ui +
(b0i - b0) + (b1i - b1)Xi. Notice that
E(vi|Xi)  E(ui|Xi) + E(b0i - b0|Xi) + XiE(b1i − b1|Xi)  0
because b0i and b1i are independent of Xi. Because E(vi | Xi) = 0, the OLS regression of Yi on Xi
will provide consistent estimates of b0  E(b0i) and b1  E(b1i). Recall that the weighted least
s i  q 0 + q1 X i2
squares estimator is the OLS estimator of Yi/si onto 1/si and Xi/si , where .
Write this regression as
Yi / s i  b 0 (1 / s i ) + b1 ( X i / s i ) + vi / s i .
This regression has two regressors, 1/si and Xi/si. Because these regressors depend only on
Xi, E(vi|Xi)  0 implies that E(vi/si | (1/si), Xi/si)  0. Thus, weighted least squares provides a
consistent estimator of b0  E(b0i) and b1  E(b1i).
Chapter 18
The Theory of Multiple Regression
18.1. (a) The regression in the matrix form is

Y  Xb + U
with
�TestScore1 � �
1 Income1 Income12 �
� � � �
TestScore 2 � 1 Income 2 Income22 �
Y � , X �
� M � �
M M M �
� � �
� �
�TestScore n � 1 Income n
� Incomen2 �
�
�U1 �
� � �b 0 �
U � �
Uβ � 2 �
,  �b1 �.
�M� �b �
� � �2 �
Un �
�
(b) The null hypothesis is H0: Rb  r versus H1: Rb  r, with
R = (0 0 1) and r = 0.
The heteroskedasticityrobust Fstatistic testing the null hypothesis is
-1
F  (Rβˆ - r )�
� � ( Rβˆ - r )/q
RSˆ R�
� βˆ �
With q  1. Under the null hypothesis,
d
F� Fq ,�
.
We reject the null hypothesis if the calculated Fstatistic is larger than the critical value of the
Fq ,�
distribution at a given significance level.
Var (Q)  E[(Q - mQ ) 2 ]

 E[(Q - mQ )(Q - mQ )�
]
 E[(c�W - c�m W )(c�
W - c� m W )�
]
 c E[(W - m W )( W - m W ) ]c
� �
18.3. (a)  c�
var( W) c  c�
Σwc
where the second equality uses the fact that Q is a scalar and the third equality uses the fact
that mQ  cm w.
(b) Because the covariance matrix �W is positive definite, we have c� �wc > 0 for every non
zero vector from the definition. Thus, var(Q) > 0. Both the vector c and the matrix �W are
finite, so var(Q)  c�
�wc is also finite. Thus, 0 < var(Q) < .
18.5. PX  X (XX)-1X, MX  In - PX.
(a) PX is idempotent because
PXPX  X(XX)-1 XX(XX)-1 X  X(XX)-1X  PX.
MX is idempotent because
M X M X  (I n - PX ) (I n - PX )  I n - PX - PX + PX PX
 I n - 2PX + PX  I n - PX  M X
PXMX  0nxn because
PX M X  PX (I n PX )  PX - PX PX  PX - PX  0n �n
ˆ � -1 �
(b) Because β  ( X X) X Y, we have
ˆ  Xβˆ  X( X�
Y X)-1 X�
Y  PX Y
which is Equation (18.27). The residual vector is
ˆ Y-Y
U ˆ  Y - P Y  (I - P )Y  M Y.
X n X X
We know that MXX is orthogonal to the columns of X:
MXX  (In - PX) X  X - PXX  X -X (XX)-1 XX X - X  0
so the residual vector can be further written as
ˆ  M Y  M ( Xb + U)  M Xb + M U  M U
U X X X X X
which is Equation (18.28).
18.7. (a) We write the regression model, Yi  b1Xi + b2Wi + ui, in the matrix form as

Y  Xb + Wg + U
with
�Y1 � �X 1 � �W1 � �u1 �
� � � � � � � �
Y X W u
Y  �2 �, X  � 2 �, W  � 2 �, U  �2 �,
�M� �M � �M � �M�
� � � � � � � �
�Yn � �X n � �Wn � �un �
b  b1 , g  b2 .
The OLS estimator is
�bˆ1 � �X�
X X�
-1
W � �X�Y�
� � � � � �
�bˆ � �W�X W�
W � �W�Y�
�2 �
-1
�b � �X� X X�
W � �X�
U�
 � 1 �+ � � � �
�b 2 � �W�
X W�
W � �W�
U�
-1
�b � �1 X� X 1
X�
W � �1n X�
U�
 � 1 �+ �1n n
� � �
�b 2 � �n W�
X W�
W � �1n W�
U�
1
n
-1
�b � �1 �n X 2 �in1 X iWi � �1n �i 1 X i ui �
1 n
 � 1 �+ �1 n n i 1 i n
� � �
�b 2 � �n �i 1 Wi X i
1
n
�in1 Wi 2 � �1 n
�n �i 1 Wi ui �
�
n 2 p
1
��
i 1 X i E ( X 2 ); 1 n
Wi 2 p
E (W 2 ); 1
�n X W p
By the law of large numbers n n i 1 n i 1 i i
E ( XW )  0 (because X and W are independent with means of zero); n
1
�in1 X i ui p E ( Xu ) 0

1
�in1 X i ui p
E ( Xu ) 0
(because X and u are independent with means of zero); n Thus
-1
�bˆ1 �p �b1 � �E ( X 2 ) 0 �� 0 �
� �� + � ��
�bˆ � �b 2 � � 0 E (W 2 ) � �E (Wu ) �
�2 �
� b1 �
� E (Wu ) �.
�b 2 + E (W 2 ) �
� �
E (Wu)
bˆ2 �
p
b2 + �b 2
(b) From the answer to (a) E (W 2 ) if E(Wu) is nonzero.
(c) Consider the population linear regression ui onto Wi:
ui  Wi + ai
where   E(Wu)/E(W2). In this population regression, by construction, E(aW)  0. Using this equation for
ui rewrite the equation to be estimated as
Yi  X i b1 + Wi b 2 + ui
 X i b1 + Wi ( b 2 +  ) + ai
 X i b1 + Wiq + ai
where q  b 2 + . A calculation like that used in part (a) can be used to show that
-1
� n ( bˆ1 - b1 ) � �1n �in1 X i2 1
�in1 X iWi � �n �i 1 X i ai �
1 n
� � 1 n n
� n �
� n ( bˆ - q ) � � n 2 �
��
� �n �i 1 Wi X i n �i 1 Wi �n �i 1 Wu ai �
1 1
� 2
-1
d
�E ( X 2 ) 0 � �S1 �
� � ��
� 0 E (W 2 ) � �S2 �
where S1 is distributed N (0, s E ( X 2 )). Thus by Slutsky’s theorem

2
a
� s a2 �
n ( bˆ1 - b1 ) �
d
N�
0, 2 �
� E( X ) �
Now consider the regression that omits W, which can be written as:
Yi  X i b1 + d i
where di  Wiq + ai. Calculations like those used above imply that
� s d2 �
(
n bˆ1r - b1 �
d
)N�
0, 2 �
� E( X ) �
.
ˆr
Since s d  s a + q E (W ), the asymptotic variance of b1 is never smaller than the asymptotic
2 2 2 2
ˆ
variance of b1 .
bˆ  ( X�
M W X ) -1 X �
MWY
M W ( Xb + Wg + U)
M W X ) -1 X �
 ( X�
 b + ( X�
M W X) -1 X�
M W U.
18.9. (a)
The last equality has used the orthogonality MWW  0. Thus
bˆ - b  ( X�
M W X) -1 X�
M W U  ( n -1 X�
M W X) -1 (n -1 X�
M W U ).
(b) Using MW  In - PW and PW  W(WW)-1W we can get
n -1X�
M W X  n -1X�
(I n - PW )X
 n -1X�
X - n-1X�
PW X
 n -1X�
X - ( n-1X�
W )( n-1 W�
W )-1 (n-1W�
X).
n -1X�
X  1n �in1 Xi X� 1
i . The (j, l) element of this matrix is n
�in1 X ji Xli .
First consider By
Assumption (ii), Xi is i.i.d., so XjiXli is i.i.d. By Assumption (iii) each element of Xi has four
moments, so by the CauchySchwarz inequality XjiXli has two moments:
E ( X li4 )  �.
E ( X 2ji X li2 ) � E ( X 4ji ) �
1
�n X X
Because XjiXli is i.i.d. with two moments, n i 1 ji li obeys the law of large numbers, so
1 n
�X ji X li �p E ( X ji X li ) .
n i 1
This is true for all the elements of n-1 XX, so
1 n
n -1X� �
p
X i � E ( Xi X i )  �XX . .
X i X� �
n i 1
Applying the same reasoning and using Assumption (ii) that (Xi, Wi, Yi) are i.i.d. and
Assumption (iii) that (Xi, Wi, ui) have four moments, we have
1 n
n -1 W�
W �Wi Wi��p E (Wi Wi�)  �WW ,
n i 1
1 n
�Xi Wi�� E (Xi Wi�)  �XW ,
p
n -1 X �
W
n i 1
and
1 n
n -1 W�
X �Wi X�
n i 1
p
i � E ( Wi X i )  �WX .
�
From Assumption (iii) we know S XX , S WW , S XW , and S WX are all finite nonzero, Slutsky’s

theorem implies
n -1X�
M W X  n -1X�
X - (n -1X�
W ) (n -1W�
W ) -1 (n -1W �
X)
p
� Σ XX - Σ XW Σ -1WW Σ WX
which is finite and invertible.
(c) The conditional expectation
�E (u1| X, W ) � �E (u1| X1 , W1 ) �
� ��
E (u | X, W ) � �E (u2 | X 2 , W2 ) �
E ( U|X, W)  � 2 
� M �� M �
� ��
�E (un | X, W ) � �E (un | X n , Wn ) �
�W1� � �W1� �
� ��
W W
 � 2 � � 2 �   W .
� M � �M �
� ��
�Wn� � �Wn� �
The second equality used Assumption (ii) that ( Xi , Wi , Yi ) are i.i.d., and the third equality
applied the conditional mean independence assumption (i).
(d) In the limit
n -1X� p
MWU � M W U|X, W)  X�
E ( X� M W W  0 k1 �1
M W E (U|X, W)  X�
because M W W  0.
-1 -1
� �
(e) n X M W X converges in probability to a finite invertible matrix, and n X M W U converges
in probability to a zero vector. Applying Slutsky’s theorem,
bˆ - b  (n -1X�
M W X) -1 (n -1X� p
M W U) � 0.
This implies
bˆ �
p
b.
�Ir 0��Q1 ' �

�0 ��
Q 2 '�
0 ��
18.11. (a) Using the hint C  [Q1 Q2] � �, where QQ  I. The result follows with AQ1.
(b) W  AV  N(A0, AInA) and the result follows immediately.
(c) VCV  VAAV  (AV)(AV)  W’W and the result follows from (b).
18.13. (a) This follows from the definition of the Lagrangian.

(b) The first order conditions are
%
(*) X(Y-X b ) + R   0
and
%
(**) R b - r  0
Solving (*) yields
% ˆ
(***) b  b + (XX)–1R .
ˆ
Multiplying by R and using (**) yields r  R b +R(XX)–1R , so that
ˆ
  -[R(X X)–1R ]-1(R b - r).
Substituting this into (***) yields the result.
% ˆ ˆ
(c) Using the result in (b), Y - X b  (Y - X b ) + X(XX)–1R[ R(XX)–1R]–1(R b - r ), so that
% % ˆ ˆ ˆ ˆ
(Y - X b ) (Y - X b )  (Y - X b )(Y - X b ) + (R b - r ) [R(X X)–1R ]–1(R b - r)
ˆ ˆ
+ 2(Y - X b ) X(XX)–1R[R(XX)–1R]–1(R b - r).
ˆ
But (Y - X b ) X  0, so the last term vanishes, and the result follows.
ˆ ˆ
(d) The result in (c) shows that (R b - r)[R(XX)–1R]–1(R b - r)  SSRRestricted - SSRUnrestricted. Also
su2  SSR /(n - kUnrestricted – 1), and the result follows immediately.
Unrestricted
18.15. (a) This follows from exercise (18.6).
% % +u%
(b) Yi  Xβ
i i , so that
-1
�n % %� n %
βˆ - β  ��Xi ' Xi � �X i ' u%i
�i 1 � i 1
-1
�n % %� n
��Xi ' Xi �
�i 1
�Xi ' M ' Mu i
� i 1
-1
�n % %� n
��Xi ' Xi �
�i 1
�Xi ' M 'ui
� i 1
-1
�n % %� n %
��Xi ' Xi �
�i 1
�Xi 'ui
� i 1
Qˆ X%  1n �in1 (T -1 �Tt 1 ( X it - X i )2 ), -1
where (T �t 1 ( X it - X i ) ) are i.i.d. with mean X% and
T 2
Q
(c)
finite variance (because Xit has finite fourth moments). The result then follows from the law of
large numbers.
(d) This follows the Central limit theorem.
(e) This follows from Slutsky’s theorem.
(f) hi are i.i.d., and the result follows from the law of large numbers.
2
-1/ 2 % ˆ -1/ 2 ˆ % %
(g) Let hi  T Xi ' u%i  hi - T ( b - b ) Xi ' Xi . Then
ˆ
%' uˆ%  h 2 + T -1 ( bˆ - b ) 2 ( X
hî2  T -1/ 2 X %' X%) 2 - 2T -1/2 ( bˆ - b )h X
% %
i i i i i i i ' Xi
1 %' X%)2 - 2T -1/ 2 ( bˆ - b ) 1 �n h X % %

�in1 hî2 - �in1 hi2  T -1 ( bˆ - b ) 2 n1 �in1 (X
1
n i i n i 1 i i ' X i
and n
�n ( X%' X%) 2 E[( X% %2

p
ˆ p
Because ( b - b ) � 0 , the result follows from (a) n i 1 i i i ' Xi ) ]
1
and (b)
�in1 hi X%i ' X%i E (h i X%i ' X%i ).
1 p
n Both (a) and (b) follow from the law of large numbers; both
(a) and (b) are averages of i.i.d. random variables. Completing the proof requires verifying
% %2 % %
that ( Xi ' X i ) has two finite moments and hi Xi ' Xi has two finite moments. These in turn
follow from 8moment assumptions for (Xit, uit) and the CauchySchwartz inequality.
Alternatively, a “strong” law of large numbers can be used to show the result with finite
fourth moments.
18.17 The results follow from the hints and matrix multiplication and addition.

Ejercicios de Econometria

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ejercicios de Econometria

Uploaded by

Copyright:

Available Formats

For Students

2.1. (a) Probability distribution function for Y

Outcome (number of heads) Y  0 Y  1 Y  2

Outcome (number of heads) Y  0 0  Y  1 1  Y  2 Y  2

2.3. For the two new random variables W  3 + 6 X and V  20 - 7Y , we have:

(b) s V  var (20 - 7Y )  ( -7) �s Y2  49 �0.1716  8.4084.

(c) s WV  cov (3 + 6 X , 20 - 7Y )  6 �(-7) cov (X , Y )  -42 �0.084  -3.528

Using obvious notation, C  M + F ; thus mC  mM + m F and s C  s M + s F + 2cov( M , F ). This

(c) s C  s M + s F + 2cov( M , F ), so that s C  12 + 18 + 2 �172.80  813.60, and

s C  813.60  28.524 thousand dollars per year.

E (Y | X  8)  14 �(0.02/0.39) + 22 �(0.03/0.39) + 30 �(0.15/0.39)

+ 402 �(0.10/0.39) + 652 �(0.09/0.39)  1778.7

(c) E ( XY )  (1 �14 �0.02) + (1 �22 : 0.05) + L + (8 �65 �0.09)  171.7

2.11. (a) 0.90

(d) When Y ~ c10 , then

(e) Y  Z , where Z ~ N (0,1), thus Pr (Y �1)  Pr ( -1 �Z �1)  0.32.

(a) E (Y )  Var (Y ) + mY  1 + 0  1; E (W )  Var (W ) + mW  100 + 0  100.

(c) The kurtosis of the normal is 3, so 3  E (Y - mY ) /s Y ; solving yields E(Y )  3; a similar

(e) m S  E ( S )  0, thus E ( S - m S )  E ( S )  0 from part (d). Thus skewness  0. Similarly,

s S2  E ( S - mS ) 2  E ( S 2 )  1.99, and E ( S - mS )4  E ( S 4 )  302.97. Thus,

mY = 0.4 and s Y  0.4 �0.6  0.24

(c) When X and Y are independent,

(b)  E ( X 4 ) - 4[ E ( X )][ E ( X 3 )] + 6[ E ( X )]2 [ E ( X 2 )] - 3[ E ( X )]4

(a) Because of the independence between X and Z , Pr ( Z  z| X  x)  Pr ( Z  z ), and

X and Z , we have E ( ZX )  m Z m X  0. Thus E ( XY )  E ( X ) + E ( ZX )  0.

cov (XY )  E[( X - m X )(Y - mY )]  E[( X - 0)(Y - 1)]

�ax i  (ax1 + ax2 + ax3 + L + axn )  a ( x1 + x2 + x3 + L + xn )  a �xi

�(a + bxi + cyi )2  �(a 2 + b2 xi2 + c 2 yi2 + 2abxi + 2acyi + 2bcxi yi )

2.27 (a) E(W)  E[E(W|Z)]  E[E(X - X%)|Z]  E[E(X|Z) - E(X|Z)]  0.

3.1. The central limit theorem suggests that when the sample size ( n ) is large, the distribution of the

Denote each voter’s preference by Y . Y  1 if the voter prefers the incumbent and Y  0 if the

� pˆ )  pˆ (1 - pˆ )  0.5375 �(1 - 0.5375)  6.2148 �10-4.

standard error is SE ( pˆ )  (var( pˆ ))  0.0249.

Because of the large sample size ( n  400), we can use Equation (3.14) in the text to get the

(d) Using Equation (3.17) in the text, the p­value for the test H 0 : p  0.5 vs. H1 : p > 0.5 is

3.5. (a) (i) The size is given by Pr(| pˆ - 0.5| > .02), where the probability is computed assuming

Pr(|pˆ - 0.5| > 0.02)  1 - Pr( -0.02 �pˆ - 0.5 �.02)

3.9. Denote the life of a light bulb from the new process by Y . The mean of Y is m and the standard

size  Pr(Y > 2100| m  2000)  1 - Pr(Y �2100| m  2000)

where Pr(Y > 2100|m  2000) means the probability that the sample mean is greater than 2100

�Y - 2150 2100 - 2150 �

The power of the manager’s testing is 1 - b  1 - 0.0062  0.9938.

3.11. Assume that n is an even number. Then Y% is constructed by applying a weight of 1/2 to the n/2

3.13 (a) Sample size n  420, sample average Y  646.2 sample standard deviation sY  19.5.

(b) The data are: sample size for small classes n1  238, sample average Y 1  657.4, sample

t act  Y 1 - Y 2  657.4 - 650.0  4.0479.

3.15. From the textbook equation (2.46), we know that E( Y )  mY and from (2.47) we know that

var( pˆ a – pˆ b )  var( pˆ a ) + var( pˆ b ) – 2cov( pˆ a , pˆ b ). But, they are independent (and thus have

samples). Thus var( pˆ a – pˆ b )  var( pˆ a ) + var( pˆ b ). For part (c), use equation 3.21 from the text

Ym , 2008 - Ym, 1992 �1.96 SE(Ym , 2008 - Ym, 1992 )

E (Yi 2 )  s Y2 + mY2 and E (YiY j )  mY2 for i �j.

3.21. Set nm  nw  n, and use equation (3.19) write the squared SE of Ym - Yw as

�in1 (Ymi - Ym ) 2 + �in1 (Ywi - Yw ) 2

�in1 (Ymi - Ym )2 + �in1 (Ywi - Yw ) 2

4.1. (a) The predicted average test score is

(c) Using the formula for b̂ 0 in Equation (4.8), we know the sample average of the test scores

 13044  131.8. s  sY2  11.5.

4.3. (a) The coefficient 9.6 shows the marginal effect of Age on AWE; that is, AWE is expected to

4.5. (a) ui represents factors other than time that influence the student’s performance on the exam

4.7. The expectation of b̂ 0 is obtained by taking expectations of both sides of Equation (4.8):

where the third equality in the above equation has used the facts that E(ui)  0 and E[( b̂1 −b1) X ] 

5.1 (a) The 95% confidence interval for b1 is {-5.82 �1.96 �2.21}, that is

The p­value for the test H 0 : b1  0 vs. H1 : b1 �0 is

(d) Using Equation (3.17) in the text, the pvalue for the test H 0 : p  0.5 vs. H1 : p > 0.5 is

The pvalue for the test H 0 : b1  0 vs. H1 : b1 �0 is

The pvalue for the test H 0 : b1  -5.6 vs. H1 : b1 �-5.6 is

7.3. (a) Yes, age is an important determinant of earnings. Using a ttest, the tstatistic is

7.7. (a) The tstatistic is 0.485 / 2.61  0.186  1.96. Therefore, the coefficient on BDR is

11.1. (a) The tstatistic for the coefficient on Experience is 0.031/0.009  3.44, which is significant

11.3. (a) The tstatistic for the coefficient on Experience is t  0.006/0.002  3, which is significant

14.3. (a) To test for a stochastic trend (unit root) in ln(IP), the ADF statistic is the tstatistic testing