1University of California, Davis Managerial Economic(ARE) 106, Summer 2009 Instructor: John H. Constantine Problem Set #3: Due Monday, August 24, 2009Problem 1: This problem requires the use of SHAZAM.Consider the problem of estimating a production function that expresses the relationship between the level of output of a product (y) and the level of an input, or factor of production (x). The SHAZAM command file is given below. When necessary, assume α= 5%. sample 1 15 read(are106/table3-2.dat) x y print x y plot ols y x stop (a) Assume that the data can be described the simple linear regression model: y= β1+ β2x+ e. Use SHAZAM estimate b1and b2. State the associated tstatistics. (b) Give an economic interpretation of the estimated parameters. (c) Draw your estimated OLS line through the data plot. (d) (i) Find the confidence interval for b2. (ii) Draw a picture and show the regions of “Reject H0” and “Do Not Reject H0”. (iii) Clearly explain what this confidence interval means. (e) Using the Confidence Interval approach, you are to test the following hypotheses. Draw β2HOon your picture in part (d, ii) for each hypothesis. (i) H0: β2= 0 (ii) H0: β2= 0.30 (iii) H0: β2= 0.50 (f) Now, conduct the three hypotheses of part (e), but this time using the t-test approach.
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