FIN 5309 Homework Assignment 2 Solutions

Fall 2011
10. a) The predicted average test score is T estScore = 520.4 5.82 22 = 392.36 b) The predicted change in the classroom average test score is T estScore = (5.82 19) (5.82 23) = 23.28 c) Using the formula for 0 , we know the sample average of the test scores across the 100 classrooms is T estScore = 0 + 1 CS = 520.4 5.82 21.4 = 395.85. d) Use the formula for the standard error of the regression (SER) to get the sum of squared residuals: SSR = (n 2)SER2 = (100 2) 11.52 = 12961. Use the formula for R2 to get the total sum of squares: T SS = 12961 SSR = = 14088 2 1R 1 0.08 T SS 14088 = = 142.3. Thus, standard n1 99

The sample variance is s2 = Y deviation is sY = 11.93. 11.

a) ui represents factors other than time that inuence the students 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. 1

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) i is satised if this years class is typical of other classes, that is, students in this years class can be viewed as random draws from the population of students that enroll in the class. ii is satised 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. 12. Using E(ui |Xi ) = 0, E(Yi |Xi ) = E(0 + 1 Xi + ui |Xi ) = 0 + 1 E(Xi |Xi ) + E(ui |Xi ) = 0 + 1 Xi . 13. a) With 1 = 0, 0 = Y and Yi = 0 = Y . Thus ESS = 0 and R2 = 0. b) If R2 = 0, then ESS = 0, so that Yi = Y for all i. But Yi = 0 + 1 Xi so that Yi = Y for all i implies that 1 = 0 or that Xi is constant for all i. If Xi n 2 is constant for all i, then i=1 Xi X = 0 and 1 is undened. a) The least squares objective function is given by 2 (Yi b0 b1 Xi )2 . To i=1 nd its minimum with respect to b0 and b1 , we derive with respect to b0 and b1 ( 2 (Yi b0 b1 Xi )2 ) ( 2 (Yi b0 b1 Xi )2 ) i=1 i=1 which yields = n (Yi b0 b1 Xi ) and = i=1 b0 b1 n 2 i=1 Xi (Yi b0 b1 Xi ). Setting these to zero and dividing by n, we nd that the OLS estimators verify a linear system of two equations. 1 n or 1 n
n n

14.

Xi
i=1

1 Yi 0 1 Xi = 0 and n

Yi 0 1 Xi = 0
i=1

i=1

1 Xi Y i 0 X 1 n

Xi = 0 and
i=1

Y 0 1 X = 0

Solving for 0 and 1 , we nd 1 = and 0 = Y 1 X 2

1 n 1 n n i=1 Xi Yi X Y n 2 2 i=1 Xi X

n i=1

Xi X
n i=1

Yi Y 2 Xi X

b) The least squares objective function is

(Yi b1 Xi )2 . To nd its minimum ( 2 (Yi b1 Xi )2 ) i=1 = with respect to b1 , we derive with respect to b1 which yields b1 2 n Xi (Yi b1 Xi ). Setting this to zero and solving for the least square i=1 n Xi Y estimator yields 1 = i=1 X 2 i . n
i=1 i n i=1

2 i=1

c) Following the same steps as in 14b yields 1 =

Xi (Yi 4) n 2 i=1 Xi