Worksheet for Econometrics I

1. State and explain the assumptions underlying the method of (ordinary) least squares.

2. Differentiate among the role of t-test and F-test in Econometrics

3. The following results have been obtained from a sample of 11 observations on the value of

sales (Y) of a firm and corresponding prices (X).

X = 519.18, Y = 217.82 ΣXi2 = 3,134,543, ΣXiYi = 1,296,836

a) Estimate the food function Y = β0+ β1X+ u and interpret your result.

b) Compute the price elasticity of sales at their mean value and interpret your result.

c) Compute R2 and interpret the result.

d) Compute the standard error of the regression estimates and conduct tests of significance at

the 5% significant level and interpret it.

e) Find the 95% confidence interval for the population parameters and interpret it

f) Predict the value of sales given price is Birr 10 and give economic meaning

4. Given Y = f(x)
ΣX2 = 40,000 ΣX = 160 n = 20
ΣY2 = 50,000 ΣY = 200 ˆ = 0.8
1

a. Assess the goodness of fit and comment on it.

b. Test the significance of β1 at 5% level using t-test.

5. The following table contains observations on the quantity demanded (Y) of a certain

commodity, its price (X1) and consumers’ income (X2).

100 75 80 70 50 65 90 100 110 60

Y
X1 5 7 6 6 8 7 5 4 3 9
X2 1000 600 1200 500 300 400 1300 1100 1300 300

a) Estimate the parameters by OLS

b) Compute the coefficient of multiple determination and interpret the result

c) Find the variance of slope parameters and also their standard errors

d) Conduct tests of significance at 5% level

1|Page
 e) Construct the 95% confidence intervals for the population parameters

6. The following results were obtained from a sample of 12 firms on their output (Y), labor input

(X1) and capital input (X2), measured in arbitrary units.

Y = 753 Y2 = 48,139 YX1 = 40, 830

X1 = 643 X1 = 34,843
2
YX2 = 6,796
X2 = 106 X2 = 976
2
X1X2 = 5,779
a) Estimate Y on X1 and X2 and give economic meaning of coefficients?

b) Given the following sample values of output (Y), compute the standard errors of the

estimates and test their statistical significance.

c) Find the multiple correlation coefficient and the unexplained variation in output

d) Construct 99 percent confidence intervals for the population parameters.

e) Estimate the partial regression coefficients, their standard errors, and the adjusted and

unadjusted R2 values.

7. The following represents the true relationship between the independent variables

X1, X2, X3, and the dependent variable Y

Yi= bo+b1X1i+b2X2i+b3X3i+Ui

Where Y=Quantity demanded X1=price of the commodity.

X2=price of the other commodities X3=Income of the consumer

Ui=disturbance term

i) Is the above relation exact? Why?

ii) What is the economic meaning of the coefficients?

iii) What will be the expected sign of the coefficients?

8. There are occasions when the two variable linear regression models assume the following

form: Yi=𝑋𝑖 +𝑒𝑖 , Where  is the parameter and 𝑒𝑖 is the disturbance term. In this model the

intercept term is zero. The model is therefore known as regression through the origin. For this

model show that

2|Page
 𝜎2𝑢
෡ = ∑𝑋𝑖𝑌𝑖 , ii) Var(𝛽
i) The least squares estimator 𝛽 ෡) = 2
where 𝜎𝑢 is estimated by 𝜎𝑢 =
2
2 2
∑𝑋𝑖 ∑𝑋𝑖
2
∑𝑒𝑖
, 𝑒𝑖 represents the residuals.
𝑛−1
9. The following data is based on the consumption expenditure and incomes for 15 households at

a particular month.

X=1922 Y=1823 XY=1,838,678

X =2,541,333
2
Y =1,789,940
2

i) Obtain marginal propensity to consume and level of autonomous consumption

ii) Construct a 95% confidence interval for the coefficients

ii) Test the significance of the coefficients at 5% level

iv) Comment on goodness of fit.
10. The following results have been obtained form a sample of 13 observations on quantity

demanded Y of a particular commodity and its corresponding price X

Y(Kg) 780 785 790 795 810 810 820 821 830 835 840 849 870

X(birr) 20 18 16 14 13 12 11 11 10 9 8 7 5

i) Estimate the linear demand function for the commodity and interpret your result.

ii) Compute the standard error of regression line and the coefficients

iii) Compute the price elasticity of demand at mean values.

iv) What is the part of variation in demand for the commodity that remains unexplained by

the regression line?

v) What is the explained proportion? What does it show?

vi) Forecast the quantity demand at price level of 13 Birr and interpret it

11. The following table shows the levels of output (Y) labour in put (X1) and capital input (X2) of

12 firms measured in arbitrary units.

X2=110  X21 =980 YX1=40,834

X1=647 X12=34,843 YX2=6,7100
Y=757 Y =48,143
2
X1X2=5,783
i) Estimate the output function Y=bo+b1X1+b2X2+U

ii) What is the economic meaning of the coefficients

3|Page
 iii) Compute the standard errors of the coefficients

iv) Run tests of significance of the coefficients

v) Test the overall significance of the supply function

vi) Compute the coefficient of multiple determination and interpret it

vii) Conduct the overall significance test and interpret your result.

12. What are some of the problems in using R2 as a measure of goodness of fit? Compare and

contrast R2 and the corrected R2 on the basis of sample size and parameters to be estimated

from a particular model.

13. Give the problems of the violation of assumptions of Classical Regression Model (CRM)

in the space provided (the third column of the following table).

Assumptions of CRM Mathematical Problems if the assumptions are

violated
Constant variance of error 𝑉𝑎𝑟(𝑈𝑖 ) = 𝛿𝑢2
term
Independence of error terms 𝐶𝑜𝑣(𝑈𝑖 𝑈𝑗 ) = 𝐸(𝑈𝑖 𝑈𝑗 )
=0
Explanatory variables are 𝑟𝑋𝑖 𝑋𝑗 ≠ 0
not perfectly linearly
correlated
Normality of error term 𝑈𝑖 ~N(0, 𝛿𝑢2)
14. Briefly discuss the nature of, reasons for , consequences of, detection of and remedial measures

for

a) Heteroscedasticity
b) Multicollinearity
c) Autocorrelation
15. Suppose that you have data of personal saving and personal income of Ethiopia for 31 year

period. Assume that graphical inspection suggest that Ui's are hetroscedasticso so that you

wanted to employ the Gordfield Quandt test. Suppose you ordered the observation in

ascending order of income and omit the nine central observations. Applying OLS to each

subset, you obtained the following result.

a) For sub set I

4|Page
 Ŝ1 = -738.84 + 0.008Ii and  Û 12 = 144,771.5

b) For Sub set II

Ŝ 2 = 1141.07 + 0.029I and  Û 22 = 769,899.2

Is there any evidence of hetroscedasticity?

16. Suppose that a research used a 20 years data on imports and GDP of Ethiopia. Applying OLS

to the observations she obtained the following import function.

M = -2461 + 0.28G

 Uˆ t2 = 573, 069

 (U −U t −1 ) = 537,192
2
t

Where M = import, G= GDP

Use the Durban Watson test to examine the problem of autocorrelation.

17. The following results have been obtained from a sample of 10 observations on the quantity

demanded(Y) of a certain commodity, its price (X1) and consumers’ income (X2).

∑𝑌 = 600 ∑𝑦 2 = 3450 ∑𝑥1 𝑦 = −300 n=10

∑𝑋1 = 60 ∑𝑥12 = 30 ∑𝑥2 𝑦 = 6500
∑𝑋2 = 800 ∑𝑥22 = 15800 ∑𝑥1 𝑥2 = −590 2
∑𝑒𝑡−1 = 350
a) State and briefly discuss the states of econometric analysis

b) State and briefly discuss the assumptions of classical regression model

c) Estimate the quantity demanded (Y) on its price(𝑋1 ) and interpret your result.

d) Estimate the quantity demanded (Y) on consumer’s income(𝑋2 ) and interpret your result.

e) Test the significance of the regression functions in (a) and (b) at 5% significance level and

interpret it

f) Compute the price and income elasticity of demanded at their mean value and interpret

your result.

g) Compute coefficient of determination (R2) in (a) and (b) and interpret the result.

5|Page
 h) Estimate the quantity demanded (Y) on its price(𝑋1 ) and consumer’s income(𝑋2 ) and

interpret your result.

i) Compute multiple coefficient of determination R2 and interpret the result.

j) Test the individual significance of the regression function at 5% significance level and

interpret it

k) Test the overall significance of the model at 5% significance level using F-test and interpret

it

l) Find the 95% confidence interval for the population parameters in (a), (b) and (f) and

interpret it

m) Predict the value of quantity demanded in (a), (b) and (f) given price is Birr 10 and income

is Birr 100 and give economic meaning

n) Test for multicollinearity using auxiliary regression and VIF method and give your

conclusion

o) Test for autocorrelation using Durbin Watson test at 5% significance level and give your

conclusion

18. The major factors of production in Dire Dawa textile factory are labour (𝑋1) and capital

(𝑋2). Data collected from the factory shows that the correlation coefficients between output

(Y) and labour employment (𝑋1) is 0.7, the correlation coefficients between output (Y) and

capital employment (𝑋2) is 0.6 and the correlation coefficients between the two factors is

0.4. Moreover, if

∑𝑦 2 = 120 തതതത
𝑋 = 65
1
∑𝑥12 = 30 തതതത
𝑋 = 105
2
∑𝑥22 = 50 𝑌ത = 200

Undo question (f) – (o) in above question number (16)

6|Page