4818-Exam2a

4818-Exam2a - Economics 4818 - Introduction to Econometrics...

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Economics 4818 - Introduction to Econometrics - Fall 2007 Midterm 2 - Answers For problems 1 and 2: Your answers do not have to be more than a couple of sentences, but make sure that you explain your answers. For problems 3 and 4: make sure that you show all your work (test statistic, critical value, rejection rule, etc.)! 1. Discuss the e/ect of increasing the sample size on the the following (make sure to explain your answer !): A) se c j ± Answer: (5 points) Increasing the sample size decreases the error variance V ar ( u ) = ± 2 and so se c j ± = r b 2 SST j ( 1 R 2 j ) will decrease, where b ± 2 is the estimator of ± 2 . In fact, se c ± j ± using n 2 se c ± j ± using n 1 q n 1 n 2 . B) Bias c j ± . Suppose that c j is biased in a small sample regression model. Answer: (5 points) The bias in c j remains as the sample size increases. C) Non-normality of the error term u Answer: (5 points) The non-normality of the error (violation of Assumption 6) does not a/ect hypothesis testing (t- and F-satistics) in large samples. 2. Answer the following questions (make sure to explain your answer !) A) What is the advantage of R 2 over R 2 ? Answer: (5 points) R 2 always increases if we include additional independent variables in our model, whether these variables are relevant or not. R 2 adjusts for the number of independent variables in the model. B) What is the appeal of beta coe¢ cients? Answer: (5 points) When all variables are standardized, we can compare the mag- nitudes of the estimated coe¢ cients to determine which factor has a larger impact on the dependent variable. C) What is the issue of overcontrolling? Answer: (5 points) This is a consequence of the ceteris paribus interpretation of allowing for an increase in an independent variable of interest, we should not include that 1
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factor in the regression.
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4818-Exam2a - Economics 4818 - Introduction to Econometrics...

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