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Unformatted text preview: Midterm Exam 2 Econ 360  Spring 2010 Professor Mumford Wednesday, March 7, 2010 mumford@purdue.edu YOUR NAME: Answer all questions clearly and legibly. Show all of your work in the space provided. Do not use additional sheets or write on the back of the page. Do not refer to your notes, the text book, or any other materials during the exam. There are 100 points possible. Maximum points for each question are noted in parentheses. You have one hour and ten minutes to complete the exam. Good luck! 1. (12 points) Define or explain the following terms: a. (3 points) linear probability model b. (3 points) multicollinearity c. (3 points) adjusted Rsquared d. (3 points) beta coefficients (standardized coefficients) 2. (9 points) Consider the simple regression model y i = + 1 x i + u i . Derive the OLS estimators and 1 as the solution to the problem of minimizing the sum of squared residuals. Show the complete derivation. 3. (4 points) Show that n X i =1 y i ( x i x ) = n X i =1 ( x i x ) ( y i y ) 4. (15 points) Consider the following population model: ln ( wage ) = + 1 educ + 2 ability + u. which satisfies assumptions MLR.1  MLR.4. Suppose that our primary interest is in 1 , the partial effect of years of education on ln ( wage ). We do not have data for ability which makes it impossible to estimate the population model. Instead we regress ln ( wage ) on educ and obtain: ln ( wage ) = + 1 educ. a. (2 points) State the zero conditional mean assumption for the population model. b. (4 points) Derive the bias in 1 . c. (3 points) Under what conditions is the bias equal to zero? d. (3 points)You observe the individuals SAT score. You are considering using SAT as a proxy for ability . What conditions must be satisfied for SAT to be a good proxy for ability ? e. (3 points) Explain what regression you should run to use SAT as a proxy for ability . If SAT is a good proxy for ability , will you be able to obtain unbiased estimates of 1 and 2 ? 5. (16 Points) You have been asked to analyze the data from an experiment designed by an economist to examine productivity under two different compensation methods. Workers are spread out over various locations with a different number of workers in each location....
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This note was uploaded on 02/06/2012 for the course ECON 360 taught by Professor Na during the Spring '10 term at Purdue UniversityWest Lafayette.
 Spring '10
 NA

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