1
Name: _____________________________________________
EC 351 – 001: Econometrics I
TEST 1
September 16, 2010
Instructions:
Provide all answers on this exam paper.
You must show all work to receive credit.
You are allowed to use your notes on this exam, provided that they are written in your own
handwriting.
Make your final answer clear in order to receive full credit.
Allocate your time
appropriately across all questions and make sure to finish within the time limit of 75 minutes.
Question values are shown beside each question as a percentage of the total exam grade.

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2
1.
For-profit companies spend a lot of time trying to understand two variables: Revenue and
Cost.
Suppose that each is normally distributed with
N
(5,100).
Economists define Profit as
Revenue minus Cost. (Hint: To apply the appropriate formula, following the notation in your
book, use
1 and
1.)
a
b
a.
(4%)
What
is the distribution of the Profit variable if Revenue and Cost are
independently distributed?
Answer: E(Profit) = E(Revenue) – E(Cost) = 5 – 5 = 0
Var(Profit) = Var(Revenue) + Var(Cost) = 100 + 100 = 200
N
(0,200)
b.
(8%)
What
is the distribution of the Profit variable if the correlation between
Revenue and Cost is 0.25?
Answer:
,
,
,
(
,
)
0.25
100 *
100
0.25*10*10
25
R C
R
C
R C
R C
Corr R C
E(Profit) = E(Revenue) – E(Cost) = 5 – 5 = 0
Var(Profit) = Var(Revenue) + Var(Cost) - 2*Cov(R,C) = 100 + 100 - 2*25 = 150
N
(0,150)