Fall 2003 - Ramanathan's Class - Final Exam

Fall 2003 - Ramanathan's Class - Final Exam - Econ 120C...

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1 Econ 120C Ramu Ramanathan Fall 2003 Final Exam Answers The campus grading regulations prohibit regarding of final exams. Therefore, read all parts of questions carefully and answer fully. Maximum number of points is 70. I. Consider the following two-equation model in which the y s are endogenous and the x s are exogenous: (1) y 1 = a 1 y 2 + a 2 x 1 + u (2) y 2 = b 1 y 1 + b 2 x 2 + b 3 x 3 + v Ia (5 points) Check the order condition for each equation and state whether the condition is satisfied for exact or over identification. Explain your answers. In the first equation, two variables are missing. This is one more than is needed and hence the equation is overidentified. The second equation has one variable missing and is exactly identified. Ib(10 points) Explicitly derive the reduced forms for the two endogenous variables. You need not try to solve backwards for the original parameters. Substituting for y 1 from the first equation into the second we get, y 2 = b 1 ( a 1 y 2 + a 2 x 1 + u) + b 2 x 2 + b 3 x 3 + v This gives y 2 (1 - a 1 b 1 ) = b 1 a 2 x 1 + b 2 x 2 + b 3 x 3 + error. Dividing by 1 - a 1 b 1 , we get y 2 = 1 1 2 1 1 b a a b - x 1 + 1 1 2 1 b a b - x 2 + 1 1 3 1 b a b - x 3 + error = 1 p x 1 + 2 p x 2 + 3 p x 3 + error Substituting this into the first equation, we have y 1 = a 1 ( 1 p x 1 + 2 p x 2 + 3 p x 3 ) + a 2 x 1 + error = ( a 1 1 p + a ) x1 + a 1 2 p x 2
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This test prep was uploaded on 04/21/2008 for the course ECON 120C taught by Professor Stohs during the Spring '08 term at UCSD.

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Fall 2003 - Ramanathan's Class - Final Exam - Econ 120C...

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