Introductory Econometrics

Problem Set 1
Nishant Chadha
Shiv Nadar University
January 26, 2014
Instructions: Please answer all the questions on the assignment. You may work in
groups but each student is required to submit his/her work individually. The assignment is
due in the tutorial section on the 3rd of Feb. Late submissions will not be accepted.
Problem 1
If X, Y are random variables and a
1
, a
2
, b
1
and b
2
are constants then prove the following:
1. Cov (a
1
X + b
1
, a
2
Y + b
2
) = a
1
a
2
Cov(X, Y )
2. V ar (a
1
X + Y ) = a
2
1
V arX + V arY + 2a
1
Cov(X, Y )
Problem 2
Let X be a random variable which takes values 1, 0, 2 with probabilities
1
8
,
1
2
and
3
8
respectively. Calculate E(X) and E(X
2
). Is E(X)
2
= E(X
2
)? Calculate V ar(X).
Problem 3
Suppose that we want to test the relationship between a students score on the nal
exam, score, and the number of classes she attended in that course, attend. To do that you
propose the following model
score =
0
+
1
attend + u
1. Do you expect this model to satisfy E(u|attend) = 0? Keep your answer brief and to
the point.
2. Keeping the above in mind do you think that
1
could be negative? Why or why not?
1
Problem 4
In class we derived estimators and

0
and

1
using the method of moments. Show that
we get the same estimators if we minimize the sum of squared errors instead.
Problem 5
1. Let

0
and

1
be the intercept and slope from the regression of y
i
on x
i
. Let c
1
, c
2
be
constants with c
2
= 0. Let

0
and

1
be the parameters from a regression of c
1
y
i
on
c
2
x
i
. Show that

1
= (c
1
/c
2
)

1
and

0
= c
1

0
.
2. Now let

0
and

1
be from a regression of c
1
+y
i
on c
2
+x
i
. Show that

0
=

0
+c
1
c
2

1
and

1
=

1
.
3. For this part let

0
and

1
be the OLS estimates from the regression of log(y
i
) on x
i
(note that here we have to assume that y
i
> 0 for all i. Why?). For c
1
> 0 let,

0
and

1
be the OLS coecients from a regression of log(c
1
x
i
) on x
i
. Show that

1
=

1
and

0
= log(c
1
) +

0
.
Problem 6
For this problem use the data provided in the attached le. It is the same data you saw
in class.
1. What is the sample average of total assets held by candidates?
2. Is this dierent for the Congress and BJP candidates? Which one is higher?
3. Generate a new variable ln assets which is the natural log of the variable totalassets.
Regress vote percent on ln assets. Interpret the slope parameter.
4. Does the slope parameter obtained above represent a cetris paribus eect? Discuss
briey.
2