Worksheet: Econometrics I (Econ 2061)

Theoretical Questions: Discussion and Workout questions

Chapter One

1. Distinguish between
A. Mathematical economics and Econometrics
B. Statistics and Econometrics
C. Economic and Econometric model
D. Theoretical and applied Econometrics
E. Single Equation model and Simultaneous-Equation model
F. Observational and experimental data
2. Define econometrics and discuss the main goals of econometrics
3. Neither “theory without measurement” nor “measurement without theory” are successful
for explaining economic phenomena.” Explain this statement.
4. Briefly explain the four main stages/steps of any econometrics research.
5. List and discuss the three main criteria to evaluate a given econometric model.
6. Discuss the three types of data in econometric analysis.
7. List and discuss the desirable properties of an econometric model.

Chapter Two: Simple Linear Regression

1. Distinguish between
A. correlation and Regression
B. mathematical and stochastic relationship
C. endogenous and exogenous variables
D. population Regression function and sample regression function
E. conditional expectation and unconditional expectation
F. linearity in variables and linearity in parameters
G. Deterministic (systematic) component and Random component
2. Briefly discuss the historical origin and the modern definition of the concept of regression.
3. Why do we need regression analysis?
4. Discuss the main reasons behind the inclusion of the error term in the econometric model.
5. What is the role of the stochastic error term in the regression analysis?
6. What do we mean by a linear regression model?
7. State and explain all the basic assumptions of classical linear Regression Model (CLRM).
8. What is meant by an intrinsically linear regression model?
9. What does the Gauss-Markov theorem state?
10. Determine whether the following models are linear in the parameters, or the variables, or both.
A. 𝑌𝑖 = 𝛽0 + 𝛽1 ln 𝑋𝑖 + 𝑈𝑖 1
D. 𝑌𝑖 = 𝛽0 + 𝛽1 (𝑋 ) + 𝑈𝑖
𝑖
B. ln 𝑌𝑖 = 𝛽0 + 𝛽1 𝑋𝑖 + 𝑈𝑖 𝛽0 +𝛽1 𝑋𝑖 +𝑈𝑖
C. ln 𝑌𝑖 = ln 𝛽0 + 𝛽1 ln 𝑋𝑖 + 𝑈𝑖
E. 𝑌𝑖 = 𝑒
 Worksheet: Econometrics I (Econ 2061)

11. The following data refers to the demand for money (M) and the rate of interest (R) in for
eight different economics:

M (In billions) 56 50 46 30 20 35 37 61
R% 6.3 4.6 5.1 7.3 8.9 5.3 6.7 3.5
A. Assuming a relationship M    R  U i , obtain the OLS estimators of  and 
B. Calculate the coefficient of determination for the data and interpret its value
C. If in a 9th economy the rate of interest is R=8.1, predict the demand for money (M) in this
economy.
12. The quantity demanded of a commodity (Y) is assumed to be a linear function of its price (X). The
following results were obtained from a sample of 10 observations.
Price (X) 15 13 12 12 9 7 7 4 6 3
Quantity (Y) 760 775 780 785 790 795 800 810 830 840
In light of the above information:
A. Estimate the linear demand function and interpret your results.
B. Estimate the standard errors of the regression coefficients
C. What percent of variation in quantity demanded is explained by the regression line?
D. Compute price elasticity of demand at X=12 and Y=780
E. Forecast the demand at price level of birr 10 & set a 95% confidence limit for the forecasted value.
F. Forecast the demand for a commodity at the mean price of the sample.
G. test the significance of regression coefficients
13. The following data refers to the price of a good ‘P’ and the quantity of the good supplied, ‘S’.
P 2 7 5 1 4 8 2 8
S 15 41 32 9 28 43 17 40
A. Estimate the linear regression line ( S )     P
B. Estimate the standard errors of ˆ and ˆ
C. What percent of variation in quantity supplied is explained by the regression line?
D. Test the hypothesis that price influences supply
E. Obtain a 95% confidence interval for 
14. The following results have been obtained from a simple of 11 observations on the values of sales (Y)
of a firm and the corresponding prices (X).
X  519.18 A. Estimate the regression line of sale on price
Y  217.82 and interpret the results

 X  3,134,543
i
2
B. What is the part of the variation in sales,

 X Y  1,296,836
i i
which is not explained by the regression

 Y  539,512
i
2 line?
C. Estimate the price elasticity of sales.
 Worksheet: Econometrics I (Econ 2061)

15. The following table includes the GNP(X) and the demand for food (Y) for a country over ten years
period.
Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Y 6 7 8 10 8 9 10 9 11 10
X 50 52 55 59 57 58 62 65 68 70
A. Estimate the regression function: 𝑌 = 𝑓(𝑋) and interpret coefficients.
B. Compute the coefficient of determination, find the explained and unexplained variation in the
food expenditure, and interpret your result.
C. Test the individual significance of your model at 5% level of significance and give your
conclusion.
D. Predict the value of Y given that X is 100 in 1995.
16. Suppose that a researcher estimates a consumptions function and obtains the following results:
C  15  0.81Yd n  19
(3.1) (18.7) R 2  0.99
where C=Consumption, Yd=disposable income, and numbers in the parenthesis are the ‘t-ratios’
A. Obtain marginal propensity to consume and level of autonomous consumption
B. Test the significant of Yd statistically using t-ratios
C. Determine the estimated standard deviations of the parameter estimates
17. A sample of 20 observations corresponding to the regression model Yi    X i  U i gave the

following data.

 Y  21.9  Y  Y   86.9
2
i i

 X  186.2   X  X   215.4
2
i i

  X  X Y
i i  Y   106.4

A. Estimate  and 
B. Calculate the variance of our estimates
C. Estimate the conditional mean of Y corresponding to a value of X fixed at X=10.
18. Given simple linear regression model: 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝒊 + 𝑼𝒊, then prove that
A. 𝛽̂0 = ̅𝑌 − 𝛽̂1 𝑋̅ G. 𝑈𝑖 ~𝑁(0, 𝛿 2 ) and 𝑌𝑖 ~𝑁(𝛽̂0 + 𝛽̂1 𝑿𝒊 , 𝛿 2 )
B. 𝛽̂1 =
∑ 𝑥𝑦
=
𝑐𝑜𝑣(𝑋,𝑌) H. 𝐸(𝛽̂0 ) = 𝛽0 and 𝐸(𝛽̂1 ) = 𝛽1
∑ 𝑥2 𝑉𝑎𝑟 (𝑋)
∑ 𝑥2𝛿2 𝛿2
C. 𝑉𝑎𝑟 (𝑈𝑖 ) = 𝛿 2 I. 𝑣𝑎𝑟 (𝛽̂0 ) = 𝑛 ∑ 𝑥2
and 𝑣𝑎𝑟 (𝛽̂1 ) = ∑ 𝑥 2
D. ∑ 𝑦𝑖 2 = ∑ 𝑦̂𝑖 2 + ∑ 𝑒𝑖 2 2
∑ 𝑒𝑖
J. 𝛿̂ 2 = 𝑛−2
E. ∑ 𝑦̂𝑖 2 = 𝛽̂1 ∑ 𝑥𝑦
K. 𝑌̅ = 𝛽̂0 + 𝛽̂1 𝑋̅
2 ∑ 𝑦̂𝑖 2 ∑𝑒 2 ̂1 ∑ 𝑥𝑦
𝛽
F. 𝑅 = =1
∑ 𝑦𝑖 2
= − ∑ 𝑦𝑖 2 ∑ 𝑦𝑖 2 L. 𝑦𝑖 = 𝛽̂1 𝑥𝑖 + 𝑒𝑖 and 𝑦̂𝑖 = 𝛽̂1 𝑥𝑖
𝑖
19. Show that OLS estimators are best in the class of linear and unbiased estimators.
 Worksheet: Econometrics I (Econ 2061)

20. There are occasions when the two variable linear regression model assumes the following form:
𝒀𝒊 = 𝜷𝟏 𝑿𝒊 + 𝑼𝒊 . In this model, the intercept term is zero and the model is therefore known as
regression through the origin. For this model, show that:
∑𝑋 𝑌
A. the least square estimator 𝛽̂1 = 𝑖 2𝑖∑ 𝑋𝑖
𝛿2 2
∑ 𝑒𝑖
B. 𝑣𝑎𝑟 (𝛽̂1 ) = ∑ 𝑋𝑖 2
𝑤ℎ𝑒𝑟𝑒 𝛿 2 𝑖𝑠 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑏𝑦: 𝛿̂ 2 = 𝑛−1
21. Prove that the estimated slope of the regression of Y on X will be equal to the reciprocal of the
estimated slope of the regression of X on Y only if 𝑹𝟐 = 𝟏. (Hint: 𝑹𝟐 𝒙,𝒚 = 𝑹𝟐 𝒚,𝒙)
22. Consider the regression model: 𝒚𝒊 = 𝜷𝟎 + 𝜷𝟏 𝒙𝒊 + 𝒖𝒊 . Where 𝒚𝒊 = 𝒀𝒊 − 𝒀 ̅ 𝑎𝑛𝑑 𝒙𝒊 = 𝑿𝒊 − 𝑿
̅ . In
this case, the regression line must pass through the origin: True or false? Justify your reason.
23. Given simple linear regression model: 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝒊 + 𝑼𝒊 , then find the maximum likelihood
estimator (MLE) for 𝜷𝟎 , 𝜷𝟏 and 𝜹𝟐 . Compare ML estimators with OLS estimators.
 Worksheet: Econometrics I (Econ 2061)

Chapter Three: Multiple Linear Regression Model

1. Distinguish between
A. Simple linear regression model and Multiple linear regression model
B. Simple and partial regression coefficients.
C. individual significance test and overall significance test
D. t-test and F-test
E. R2 and adjusted R2
F. Collinearity and multicollinearity
2. Given multiple linear Regression Model: 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 + 𝑼𝒊 . Then, show that:
A. 𝛽̂0 = 𝑌̅ − 𝛽̂1 𝑋̅1 + 𝛽̂2 𝑋̅2 ̅ 𝟐 = 1 − (1 − 𝑅 2 ) (𝑛−1)
F. 𝑹 𝑛−𝑘
∑𝑥 𝑦 . ∑ 𝑥2 2 − ∑ 𝑥1 𝑥2 . ∑ 𝑥2 𝑦
B. 𝛽̂1 = 1∑ 2 G. 𝑣𝑎𝑟 (𝛽̂1 ) =
̂2 ∑ 𝑥2
𝛿 2𝑖
𝑥1 2 ∑ 𝑥2 2 −∑(𝑥1 𝑥2 ) ∑ 𝑥1 2 ∑ 𝑥2 2 −∑(𝑥1 𝑥2 )2
∑𝑥 𝑦 . ∑ 𝑥1 2 − ∑ 𝑥1 𝑥2 . ∑ 𝑥1 𝑦
C. 𝛽̂2 = 2∑ 2 ̂2 ∑ 𝑥2
𝑥1 2 ∑ 𝑥2 2 −∑(𝑥1 𝑥2 ) 𝛿
H. 𝑣𝑎𝑟 (𝛽̂1 ) = 1𝑖
∑ 𝑥1 2 ∑ 𝑥2 2 −∑(𝑥1 𝑥2 )2
D. ∑ 𝑦̂𝑖 2 = 𝛽̂1 ∑ 𝑥1 𝑦 + 𝛽̂2 ∑ 𝑥2 𝑦 𝑅2 ⁄ 𝑅2 𝑛−𝑘
E. 𝑹 𝟐 ∑ 𝑦̂ 2 ∑𝑒 2
= ∑ 𝑖2 = 1 − ∑ 𝑖2 = I. 𝐹 = 1−𝑅2𝑘−1 = 1−𝑅2 ( 𝑘−1 )
⁄𝑛−𝑘
𝑦𝑖 𝑦𝑖
̂ ̂
𝛽1 ∑ 𝑥1 𝑦+𝛽2 ∑ 𝑥2 𝑦
∑ 𝑦𝑖 2
3. The general linear regression model with K regressors is written in the form:
𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 +. . . + 𝜷𝒌 𝑿𝒌𝒊 + 𝑼𝒊 . Then, show that:
A. This model can be written in vector form using matrix approach as: 𝒀 = 𝜷𝑿 + 𝑼, where
Y, 𝜷 and X are vectors of dependent variable , parameters to be estimated and regressors
respectively.
̂ = (𝑿′ 𝑿)−𝟏 𝑿′ 𝑿, where 𝜷
B. 𝜷 ̂ is the vector of required OLS estimators, 𝜷
̂ 0, ̂
𝜷1, ̂ ̂𝑘.
𝜷2 , . . . 𝜷
̂ ) = 𝜹𝟐 (𝑿′ 𝑿)−𝟏
C. 𝒗𝒂𝒓(𝜷
̂ is BLUE.
D. 𝜷
4. The following table shows the values of consumption (Y), current income (X1) and wealth (X2).
Y 3 4 5 6 7 9 8 10 12 14
X1 15 20 30 42 50 54 65 72 85 19
X2 16 13 10 7 7 5 4 3 5 2

Then, answer the following questions

A. Estimate the OLS regression function of Y on X1 and X2.
B. Compute R2 and the standard errors of estimated parameters.
 Worksheet: Econometrics I (Econ 2061)

C. Test their statistical significance at 5% level of significance and give your conclusion.
D. Construct 95% confidence intervals for population parameters.
5. If the model 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 + 𝑼𝒊 is to be estimated from a sample of 20
observations using the semi- processed data given in matrix in deviation form.

0.5  0.08 100

( x x) 1  xy  and X 1 =10, X 2 =25 and Y  30
 0.08 0.6 250

Then, obtain the OLS estimate of the above parameters.

6. The model 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 + 𝜷𝟑 𝑿𝟑𝒊 + 𝑼𝒊 is to be estimated from a sample of 40

observations. Using the information below obtain the OLS estimate of the parameters of the
above model.
1000
0.1  0.12  0.03
2300
( x / x) 1   0.12 0.04 0.02 X Y 
1,100
X 1  400 ,  X 2  200 , and
 0.03 0.02 0.08
3,200
__ __

 X 3  600 Where x  X i  X i and y  Yi  Y

7. Given the following observations on output (Y), labor (X1) and capital input (X2) for 12 firms:
Firms 1 2 3 4 5 6 7 8 9 10 11 12
Output 14 18 23 39 24 60 56 65 76 15 27 35
Labor 11 13 22 45 30 60 62 57 76 15 28 34
Capital 30 24 31 27 31 56 42 90 80 18 30 20

A. Estimate the OLS regression function of Y on X1 and X2

B. Fit a cobb-Douglas production function using the above data: 𝒀 = 𝜷𝟎 𝑿𝟏 𝜷𝟏 𝑿𝟐𝜷𝟐 𝒆𝑼𝒊
C. What is the marginal and average productivity of factors of Labor and Capital?
D. What do your results suggest regarding returns to scale
E. Conduct appropriate tests of significance at 5% and 1% level of significance.

8. In a study of 100 firms, the total cost(C) was assumed to be dependent on the rate of output
(X1) and the rate of absenteeism (X2). Their means were: C  6 , X 1  3 and X 2  4 . The
matrix showing sums of squares and cross products adjusted for means is
 Worksheet: Econometrics I (Econ 2061)

c x1 x2

c 100 50 40
__ __
x1 50 50 -70 where, xi  X i  X i and c  Ci  C
x 2 40 -70 900
Estimate the linear relationship between C and the other two variables (X1 and X2).
9. The model 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 + 𝜷𝟑 𝑿𝟑𝒊 +𝑼𝒊 was estimated by OLS from 26 observations
̂ 𝒊 = 𝟐 + 𝟑. 𝟓𝑿𝟏𝒊 − 𝟎. 𝟕𝑿𝟐𝒊 + 𝟐𝑿𝟑𝒊
and the results were 𝒀
(1.9) (2.2) (1.5) t-ratios are in brackets and R2 =0.982.
The same model was estimated with the restrictions 𝜷𝟏 = 𝜷𝟐 . Estimates were
̂ 𝒊 = 𝟏. 𝟓 + 𝟑(𝑿𝟏𝒊 + 𝑿𝟐𝒊 ) − 𝟎. 𝟔𝑿𝟑𝒊
𝒀 R2 =0.876
(2.7) (2.4)
A. Test the significance of restrictions 𝜷𝟏 = 𝜷𝟐 .
B. Suppose 𝑿𝟐𝒊 is dropped from the equation, would R2 rise or fall? What about 𝑅̅ 2 ?
10. In a model 𝒀𝒊 = 𝜷𝟎 + 𝜷𝟏 𝑿𝟏𝒊 + 𝜷𝟐 𝑿𝟐𝒊 + 𝜷𝟑 𝑿𝟑𝒊 +𝑼𝒊 , the coefficients are known to be related to a
more basic economic parameter 𝜶 according to the equations: 𝜷𝟏 + 𝜷𝟐 = 𝜶 and 𝜷𝟏 + 𝜷𝟑 = −𝜶.
Assuming that X’s are fixed and 𝑼𝒊 ~𝑵(𝟎, 𝜹𝟐 ). Find the BLUE estimator ( 𝜶
̂ ) of 𝜶.