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ProblemSet9Ans

# ProblemSet9Ans - ECON 3200 Introduction to Econometrics...

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ECON 3200 Introduction to Econometrics Answers for Problem Set 9 Problem 1 (Wooldridge 16.2) Using simple economics, the first equation must be the demand function, as it depends on income, which is a common determinant of demand. The second equation contains a variable, rainfall , that affects crop production and therefore corn supply. Problem 2 (Wooldridge 16.4) We can easily see that the rank condition for identifying the second equation does not hold: there are no exogenous variables appearing in the first equation that are not also in the second equation. The first equation is identified provided γ 3 0 (and we would presume γ 3 < 0). This gives us an exogenous variable, log( price ), that can be used as an IV for alcohol in estimating the first equation by 2SLS (which is just standard IV in this case). Problem 3 (Wooldridge C16.3) 1. The OLS estimates are ° inf = 25.23 - .215 open (4.10) (.093) n = 114, R 2 = .045. The IV estimates are ° inf = 29.61 - .333 open (5.66) (.140) n = 114, R 2 = .032.

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