Dr. Valerie R. Bencivenga Economics 329 PRACTICE HOMEWORK #1A: ANSWERS 1.a. b. c. d. e.

discrete continuous discrete (dummy) discrete continuous (or approximately continuous)

2.a. b.

c. d.

e.

Mode. It does not make sense to average nuclear power plants and hydroelectric plants. Median. This variable probably has a skewed distribution, with a small number of households having large net worth. The mean would be distorted by this small number of large values of the variable. Mean. There is no reason to think that this variable has a skewed distribution. Mean. There is no reason to think that this variable has a skewed distribution. But if, upon examining the data, it seems that a small number of workers work lots of overtime, and that this will distort the mean, then the median would be preferred. Median. This variable probably has a very skewed distribution, where a small number of very valuable homes would distort the mean.

3.a. b. c. d. e.

millions of hours per year, or just millions of hours. 1/year or per year if the growth rate is stated as a proportional growth rate, and %/year or percent per year if the growth rate is stated in percentage points (or just unit-free). (millions of hours per year)2, or (millions of hours)2. millions of hour per year times billions of dollars per year, or just millions of hours times billions of dollars. unit-free.

4.a. b.

The mean will increase, because a positive value is being added to the original set of deviations. The variance will increase. The variance is
s2 X 1 n1

(X i X)2 . Obviously, if we add an

i1

observation whose value equals X , the variance declines, because the sum of squared deviations does not increase, and the denominator increases. However, the addition of a value above X will increase the mean and add a term to the sum and increase the denominator. Intuitively, if we add an observation to the upper part of the distribution of the variable sufficiently above the mean of the original distributionwe would expect the second of these three effects to dominate, and so we would expect s 2 to increase, indicating that the X distribution now has more dispersionand this intuition is correct. To establish this formally involves a lot of algebra. (Note that if the added observation were sufficiently below the mean of the original distribution, the variance also would increase.)

c.

d. e.

n1 The median will either not change, or it will increase, since it goes from the observation to 2 n2 the observation, where n is the number of original observations. 2 The range will not change. 3(n 1) The interquartile range will either not change, or change slightly (from observation 4 (n 1) 3(n 2) (n 2) observation, to observation observation). It can either increase or 4 4 4 decrease; neither the 1st quartile nor the 3rd quartile can decrease (each will either remain the same or increase), but the interquartile range will decrease if the 1st quartile increases more than the 3rd quartile increases. 21(66) 1(77) 66.5 inches 22 21(66) 1(x) 67 1474 1386 x 88 inches (7 feet, 4 inches) 22 X

5.

a. b.

6.a.

The distribution of the original data set is symmetric, so the median equals the mean, and it is easy to see that the mean is zero. To increase the variance without changing the median or mean, increase one of the positive deviations and increase the corresponding negative deviation by the same amount (in absolute value). For example, change the 20 to 30 and 20 to 30, or change 10 to 15 and 10 to 15. The sum of deviations remains zero so the mean does not need to change. The distribution remains symmetric so the median continues to equal the mean. And the sum or squared deviations increases, so the variance increases. The median of the original data set is zero (and the mean is zero). Increasing any of the values in the original data set except the third observation (zero) will cause the mean to increase, while the median remains zero. Some examples: 10 10 0 10 20 20 0 0 10 20 20 10 0 20 20 20 10 0 10 300 0 0 0 300 300 These examples should make the point that the median does not use very much information in the data set! That is why the mean is preferred, unless there is a reason not to use it (such as considerable skewness). Adding any positive constant to all of the observations will accomplish this. In terms of a linear transformation, this means Y a X Y a X . The variance is unchanged: s2 s2 . For Y X example, add 10 to each observation: 10 0 10 20 30

b.

c.

d.

Adding a sixth observation that is a positive number will increase the mean and the median. The effect on the variance depends on (a) the effect of the change in the mean on the original five deviations (three will increase and two will decrease); (b) the effect of adding a sixth deviation (which will be positive); and (c) the effect of changing the sample size (the denominator of the variance increases from four to five). The third effect decreases the variance; the second effect increases the variance; and the first effect is ambiguous. However, provided that the added observation is sufficiently large, the second effect will outweigh the first and third effects, and the variance will increase. An example would be to add an observation equal to 30. 20 10 0 10 20 30 The median and mean increase to 5. The variance increases to 350. We need to add a negative observation to decrease the median and the mean. The effects on the variance listed in part d suggest that this observation cannot be too large in absolute value if we want the variance to decrease, the third effect must be large compared to the second. An example would be to add an observation equal to 6. The median decreases to 3. The mean decreases to 1 (since the original observations sum to zero, and we are now dividing by a sample size of 6). The variance, which was 250, decreases to 1 s 2 [ (20 (1))2 (10 (1))2 (6 (1))2 (0 (1))2 (10 (1))2 (20 (1))2 ] 5 1 (361 81 25 1 121 441) 206 5

e.

7.a.

W a bX and s 2 b 2 s 2 W X 2 2 b 1 s W sX
a 0 and b 1 W X

X
b 1 s 2 s 2 W X a 0 and b 1 W X

b.

c.

b 1 s2 s2 W X a 0 and b 1 W X

d.

s2 W

1 n1

X (Wi W)2 n 1 (a bXi a bX)2 b2 n 1 (X i X)2 b2 s2

i1

i1

i1

The additive constant, a, drops out.

s WZ . We just showed that s 2 (and therefore s W ) does not depend on a; for the same W sWsZ reason, s Z does not depend on c. So all we have to show is that s WZ does not depend on a or c: rWZ

s WZ

1 n1

i1

(Wi W)(Z i Z)
n

1 n1

(a bXi a bX)(c dYi c dY)

i1

bd

1 n1

(X i X)(Yi Y) bd sXY
i1

Both additive constants, a and c, drop out. e.

s WZ bd sXY from part d, and b 1 and d 1 s WZ s XY . s bdsXY bd s XY rWZ WX rXY since bd > 0 s W s Z |b|s X |d|s Y |bd| s X s Y

8.

Of course this is not the lessonmany former smokers quit because of health problems such as emphysema or heart disease. This is an observational study (the subjects have chosen whether to be never-smokers, smokers, or former smokers), and which treatment a particular subject receives (in particular, smoker or former smoker) is confounded with the effects of the treatment (health).

9.

Answer omitted.