CED6040, Prof. Stanberry
Exam #2
Due 11/23/15
Total: 100 points.
1. (20 points) Consider the following equation relating dollars spent on soft drink
advertising by a company to dollars of sales of its product in a quarter:
Sales = 2,326,000,000 + 1.25 ad

Linear functions
What is a linear function
Anytime you see a function with intercepts and
slopes:
y = 0 + 1x1
y = 0 + 1x1 + 2x2
Adding different variables together, where we can
multiply the variables by constants and add
another constant are examples

CHAPTER 1
TEACHING NOTES
You have substantial latitude about what to emphasize in Chapter 1. I find it useful to talk about
the economics of crime example (Example 1.1) and the wage example (Example 1.2) so that
students see, at the outset, that econometr

SOLUTIONS TO PROBLEMS
4.1 (i) and (iii) generally cause the t statistics not to have a t distribution under H0.
Homoskedasticity is one of the CLM assumptions. An important omitted variable violates
Assumption MLR.3. The CLM assumptions contain no mention

CED6040, Prof. Stanberry
Exam #1
Due: 10/19/15, in class
1. (20 points) Suppose that percent share of the vote that the incumbent candidate gets in an
election (pctshare) is modeled as a linear function of dollars (in hundreds of thousands) spent
on adver

CED6040, Prof. Stanberry
Exam #3
Due 12/18/15, 9am
1. (10 points) In an equation for annual data, suppose that:
unempt =2.7-.68 inft -.25inft-1 +.33inft-2 +ut ,
where unempt is an unemployment rate at time t and inft is the ination rate. What
are the impa

SOLUTIONS TO PROBLEMS
9.1 There is functional form misspecification if 6 0 or 7 0, where these are the population
parameters on ceoten2 and comten2, respectively. Therefore, we test the joint significance of
these variables using the R-squared form of the

Solutions W1
1.1 (i) Ideally, we could randomly assign students to classes of different
sizes. That is, each student is assigned a different class size without
regard to any student characteristics such as ability and family
background. For reasons we wil

SOLUTIONS TO PROBLEMS
8.1 Parts (ii) and (iii). The homoskedasticity assumption played no role in Chapter 5 in showing
that OLS is consistent. But we know that heteroskedasticity causes statistical inference based on
the usual t and F statistics to be inv

SOLUTIONS TO PROBLEMS
6.1 The generality is not necessary. The t statistic on roe2 is only about .30, which shows that
roe2 is very statistically insignificant. Plus, having the squared term has only a minor effect on
the slope even for large values of ro

SOLUTIONS TO PROBLEMS
7.1 (i) The coefficient on male is 87.75, so a man is estimated to sleep almost one and one-half
hours more per week than a comparable woman. Further, tmale = 87.75/34.33 2.56, which is
close to the 1% critical value against a two-si

SOLUTIONS TO PROBLEMS
5.1 Write y = 0 + 1 x1 + u, and take the expected value: E(y) = 0 + 1 E(x1) + E(u), or y =
0 + 1 x since E(u) = 0, where y = E(y) and x = E(x1). We can rewrite this as 0 = y - 1
x. Now, 0 = y 1 x1 . Taking the plim of this we have

the variances, they should appeal to the Gauss-Markov theorem for the superiority of OLS over
any other linear, unbiased estimator.
SOLUTIONS TO PROBLEMS
3.1 (i) hsperc is defined so that the smaller it is, the lower the students standing in high
school.

SOLUTIONS TO PROBLEMS
11.1 Because of covariance stationarity, 0 = Var(xt) does not depend on t, so sd(xt+h) =
0 for
any h 0. By definition, Corr(xt,xt+h) = Cov(xt,xt+h)/[sd(xt) sd(xt+h)] = h /( 0 0 ) = h / 0 .
11.2 (i) E(xt) = E(et) (1/2)E(et-1) + (1/2)

SOLUTIONS TO PROBLEMS
10.1 (i) Disagree. Most time series processes are correlated over time, and many of them
strongly correlated. This means they cannot be independent across observations, which simply
represent different time periods. Even series that

SOLUTIONS TO PROBLEMS
12.1 We can reason this from equation (12.4) because the usual OLS standard error is an
estimate of / SSTx . When the dependent and independent variables are in level (or log) form,
the AR(1) parameter, , tends to be positive in time