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Assignment 1
Question 2
Both models are linear regression models, which meet the assumptions of the
ordinary least square (OLS) regression. The assumptions are: 1) both models are linear
in parameters; 2) the data collected is a random sample from the population; 3) sample
variations of independent variables exist; 4) the expected value of the error terms is zero;
and 5) the residuals have the constant variance. The inference of the regression outputs
of the two models is correlated to the validity of these assumptions. For the estimate of
the first model, the STATA command is “regress lwage exper assists black”. The first
n = 269, R2 = .2678
The STATA command for the second model is “regress lwage exper assists black points”.
lwage = 5.592 + .078 exper + .005 assists + .137 black + .082 points
n = 269, R2 = .4743
The p-value of β2 is 0.809 that is higher than the critical value of 0.05, suggesting
Question 3
In order to get a 90% confidence interval for the effect of points, a new regression
is run by the STATA command “regress lwage exper assists black points, level (90)”.
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Thus, the 90% confidence interval for the effect of one more point per game on player’s
annual salary is [0.069, 0.095]. The confidence interval can be also calculated by the
formula “𝑥 ± z*(σ/ 𝑛)”, where σ/ 𝑛 = standard error. The coefficient of points is 0.082,
the z-score for 90% confidence level is 1.645 and the standard error is 0.008. Thus, the
lower bound of the confidence interval is 0.069= (0.082- 1.645*0.008) and the upper
Question 4
R-square can tell the goodness of fit of the model. Specifically, the R-square
indicates the degree to which the dependent variable is explained by the model. In general,
the higher R-square indicates the better goodness of fit of a model. The R-square of the
first model is 0.2678 while the R-square of the second model is 0.4743. Thus, the second
model is preferred to the first model since the second one has the higher R-square, which
means that 47.43 percent of variations in the logarithm of annual salary can be explained
Question 5
lwage = 5.592 + .078 exper + .005 assists + .137 black + .082 points
Thus, when exper = 5, assists = 3 and points = 20, a black player can earn 7.774 (= 5.592
+ 0.078*5 + 0.005*3 + 0.137*1 + 0.082*20). Therefore, the log of annual salary for a black
player with five years of experiences, 20 points and 3 assists per game is 7.774.
Question 6
The null hypothesis is that the effect of an additional year of experience on annual
salary of players is the same to the effect of one more point per game. The alternative
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hypothesis is that the effect of an additional year of experience on annual salary of players
is different from the effect of one more point per game. In a numeric way, the null and
H0 : β 1 - β4 = 0
Ha : β 1 - β4 ≠ 0
In order to test the hypothesis, the regression based on the second model is run
under the STATA command “regress lwage exper assists black points”. Then the STATA
command “test (_b[exper] = _b[points])” can be used to test the hypothesis mentioned
above. The result is F (1, 264) = 0.07 with a p-value of 0.7882, suggesting that the null
hypothesis cannot be rejected at the critical value of 5%. This means that the effect of an
additional year of experience on annual salary of players is the same to the effect of one
Question 7
It is clear that, with the reference to the second model, we can state that the
variables assists and black are not useful in explaining players’ annual salary. In the
regression analysis of the second model, the coefficients of the two variables are not
statistically significant at the critical level of 5%. After running the second model, the post-
estimation can also help test whether the two variables assists and black are not useful
in explaining players’ annual salary. After running the second model under STATA
command “regress lwage exper assists black points”, I use the command “test (assists
The null hypothesis is that the variable- black has no effect on the players’ annual
salary that the variable- assists has no effect on the players’ annual salary. The alternative
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hypothesis is that the variable- black has the effect on the players’ annual salary and that
the variable- assists has the effect on the players’ annual salary. In a numerical way:
H0: β2 = 0, β3 = 0
Ha: β2 ≠ 0, β3 ≠ 0
The result is F (2, 264) = 0.95 with a p-value of 0.3885, suggesting that the null
hypothesis cannot be rejected at the critical value of 5%. This means that the variables
assists and black have no significant effect on the players’ annual salary and hence these
Question 8
The STATA command for the new model is “regress lwage exper expersq assists
lwage = 5.417 + .172 exper – .007 exper2 - .003 assists + .139 black + .080 points
n = 269, R2 = .4872
The marginal effect of the experience on the players’ annual salary is equal to = 0.158
experience on the players’ annual salary is constant in the population, since the marginal
effect (Δlwage/ Δexper) = β1 + 2β2, where the marginal effect is a constant rather than a
linear function. Thus, the result supports our belief that the marginal effect of the
experience on the players’ annual salary is constant instead of variable in the population.