140_problems3 - ECON 140, Fall 2008 Alex Rothenberg...

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ECON 140, Fall 2008 Alex Rothenberg Practice Problems for R 2 , Heteroskedasticity, and Multiple Regression Problem 1 Suppose that you are predicting household consumption ( HCONS ) for a cross-section of American families. Assume that the expected value of consumption is a linear function of household income ( INC ), family size ( FAMSIZE ), the number of children 5 years and under ( YNGKIDS ), the number of children 14 years and over ( OLDKIDS ), and an indicator for a female-headed household ( FEMHEAD ). 1. Explain why the conditional variance of household consumption might vary with household income. 2. How would you test your hypothesis about the conditional variance of household consumption? Assume that the model of conditional variance is: σ 2 i = exp { γ 0 + γ 1 INC i + γ 2 FAMSIZE i + γ 3 YNGKIDS i + γ 4 OLDKIDS i + γ 5 FEMHEAD i } Be sure to list all the steps involved – the regressions necessary to run, the null and alternative hypotheses, the type of test statistic, and the decision rule. 3. Suppose that a particular data set provides evidence “beyond a reasonable doubt” that
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140_problems3 - ECON 140, Fall 2008 Alex Rothenberg...

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