Question No.

Table below gives data on 81 cars about MPG (average miles per gallons), HP (engine
horsepower), VOL (cubic feet of cab space), SP (top speed, miles per hour), and WT
(vehicle weight in 100 lbs.).

a. Consider the following model:

MPGi = β1 + β2 SPi + β3 HPi + β4 WTi + μi

Estimate the parameters of this model and interpret the results. Do they make
economic sense?

Solution:

S.No. MPG SP HP VOL WT S.No. MPG SP HP VOL WT S.No. MPG SP HP VOL WT

1 65.4 96.0 49.0 89.0 17.5 29 46.9 90.0 52.0 104.0 27.5 57 28.0 102.0 96.0 92.0 35.0
2 56.0 97.0 55.0 92.0 20.0 30 36.3 112.0 103.0 107.0 27.5 58 28.0 109.0 115.0 101.0 35.0
3 55.9 97.0 55.0 92.0 20.0 31 36.1 103.0 84.0 114.0 27.5 59 28.0 104.0 100.0 94.0 35.0
4 49.0 105.0 70.0 92.0 20.0 32 36.1 103.0 84.0 101.0 27.5 60 28.0 105.0 100.0 115.0 35.0
5 46.5 96.0 53.0 92.0 20.0 33 35.4 111.0 102.0 97.0 27.5 61 27.7 120.0 145.0 111.0 35.0
6 46.2 105.0 70.0 89.0 20.0 34 35.3 111.0 102.0 113.0 27.5 62 25.6 107.0 120.0 116.0 40.0
7 45.4 97.0 55.0 92.0 20.0 35 35.1 102.0 81.0 101.0 27.5 63 25.3 114.0 140.0 131.0 40.0
8 59.2 98.0 62.0 50.0 22.5 36 35.1 106.0 90.0 98.0 27.5 64 23.9 114.0 140.0 123.0 40.0
9 53.3 98.0 62.0 50.0 22.5 37 35.0 106.0 90.0 88.0 27.5 65 23.6 117.0 150.0 121.0 40.0
10 43.4 107.0 80.0 94.0 22.5 38 33.2 109.0 102.0 86.0 30.0 66 23.6 122.0 165.0 50.0 40.0
11 41.1 103.0 73.0 89.0 22.5 39 32.9 109.0 102.0 86.0 30.0 67 23.6 122.0 165.0 114.0 40.0
12 40.9 113.0 92.0 50.0 22.5 40 32.3 120.0 130.0 92.0 30.0 68 23.6 122.0 165.0 127.0 40.0
13 40.9 113.0 92.0 99.0 22.5 41 32.2 106.0 95.0 113.0 30.0 69 23.6 122.0 165.0 123.0 40.0
14 40.4 103.0 73.0 89.0 22.5 42 32.2 106.0 95.0 106.0 30.0 70 23.5 148.0 245.0 112.0 40.0
15 39.6 100.0 66.0 89.0 22.5 43 32.2 109.0 102.0 92.0 30.0 71 23.4 160.0 280.0 50.0 40.0
16 39.3 103.0 73.0 89.0 22.5 44 32.2 106.0 95.0 88.0 30.0 72 23.4 121.0 162.0 135.0 40.0
17 38.9 106.0 78.0 91.0 22.5 45 31.5 105.0 93.0 102.0 30.0 73 23.1 121.0 162.0 132.0 40.0
18 38.8 113.0 92.0 50.0 22.5 46 31.5 108.0 100.0 99.0 30.0 74 22.9 110.0 140.0 160.0 45.0
19 38.2 106.0 78.0 91.0 22.5 47 31.4 108.0 100.0 111.0 30.0 75 22.9 110.0 140.0 129.0 45.0
20 42.2 109.0 90.0 103.0 25.0 48 31.4 107.0 98.0 103.0 30.0 76 19.5 121.0 175.0 129.0 45.0
21 40.9 110.0 92.0 99.0 25.0 49 31.2 120.0 130.0 86.0 30.0 77 18.1 165.0 322.0 50.0 45.0
22 40.7 101.0 74.0 107.0 25.0 50 33.7 109.0 115.0 101.0 35.0 78 17.2 140.0 238.0 115.0 45.0
23 40.0 111.0 95.0 101.0 25.0 51 32.6 109.0 115.0 101.0 35.0 79 17.0 147.0 263.0 50.0 45.0
24 39.3 105.0 81.0 96.0 25.0 52 31.3 109.0 115.0 101.0 35.0 80 16.7 157.0 295.0 119.0 45.0
25 38.8 111.0 95.0 89.0 25.0 53 31.3 109.0 115.0 124.0 35.0 81 13.2 130.0 236.0 107.0 55.0
26 38.4 110.0 92.0 50.0 25.0 54 30.4 133.0 180.0 113.0 35.0
27 38.4 110.0 92.0 117.0 25.0 55 28.9 125.0 160.0 113.0 35.0
28 38.4 110.0 92.0 99.0 25.0 56 28.0 115.0 130.0 124.0 35.0
 Variables Entered/Removeda

Variables Variables
Model Entered Removed Method

1 WT, SP, HPb . Enter

a. Dependent Variable: MPG

b. All requested variables entered.

Model Summary

Change Statistics

R Adjusted R Std. Error of R Square F Sig. F

Model R Square Square the Estimate Change Change df1 df2 Change

1 .940a .883 .878 3.50787 .883 193.453 3 77 .000

a. Predictors: (Constant), WT, SP, HP

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1 Regression 7141.405 3 2380.468 193.453 .000b

Residual 947.498 77 12.305

Total 8088.903 80

a. Dependent Variable: MPG

b. Predictors: (Constant), WT, SP, HP

Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 189.960 22.529 8.432 .000

SP -1.272 .233 -1.786 -5.455 .000

HP .390 .076 2.218 5.121 .000

WT -1.903 .186 -1.545 -10.259 .000

a. Dependent Variable: MPG

MPG = 189.96 – 1.272 SP + 0.39 HP – 1.903 WT

As expected, MPG is positively related to HP and negatively related to speed and weight. All
coefficients are significant statistically.
 b. Would you expect the error variance in the preceding to be heteroscedastic? Why?
Solution:
Since this is a cross-sectional data involving a diversity of cars, a prior one would expect
heteroscedasticity.

c. Use the White test to find out if the error variance is heteroscedastic.
Solution:

Variables Entered/Removeda

Variables Variables
Model Entered Removed Method

1 SP_HP_WT,
SP, WT,
Squa_SP,
Squa_WT, HP, . Enter
Squa_HP,
SP_WT,
SP_HPb

a. Dependent Variable: Squa_RES

b. Tolerance = .000 limit reached.

Model Summaryb

Change Statistics

R Adjusted R Std. Error of R Square F Sig. F Durbin-

Model R Square Square the Estimate Change Change df1 df2 Change Watson

1 .708a .502 .352 25.95243 .502 3.359 9 30 .006 1.850

a. Predictors: (Constant), SP_HP_WT, SP, WT, Squa_SP, Squa_WT, HP, Squa_HP, SP_WT, SP_HP
b. Dependent Variable: Squa_RES

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1 Regression 20358.611 9 2262.068 3.359 .006b

Residual 20205.862 30 673.529

Total 40564.473 39

a. Dependent Variable: Squa_RES

b. Predictors: (Constant), SP_HP_WT, SP, WT, Squa_SP, Squa_WT, HP, Squa_HP, SP_WT,
SP_HP
 Excluded Variablesa

Collinearity

Partial Statistics

Model Beta In t Sig. Correlation Tolerance

1 HP_WT -68.246b -1.598 .121 -.285 8.660E-6

a. Dependent Variable: Squa_RES

b. Predictors in the Model: (Constant), SP_HP_WT, SP, WT, Squa_SP, Squa_WT, HP,
Squa_HP, SP_WT, SP_HP

Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 551.998 1005.114 .549 .587

SP 7.767 5.089 3.913 1.526 .137

HP -2.413 1.638 -4.515 -1.473 .151

WT 4.753 5.700 .850 .834 .411

Squa_SP -.113 .109 -4.565 -1.039 .307

Squa_HP -.064 .058 -5.845 -1.105 .278

Squa_WT .309 .668 1.477 .462 .647

SP_HP .132 .152 9.620 .871 .391

SP_WT -.542 .454 -7.096 -1.195 .242

SP_HP_WT .002 .002 5.621 1.089 .285

a. Dependent Variable: Squa_RES

Regressing the squared residuals obtained from the model shown in (a) on the three
regressors, their squared terms, and their cross-product terms, we obtain
R2 = 0.502
nR2 = 81 × 0.502
= 40.662
The 5 percent critical chi-square value for 9 df is 16.919.
Since calculated value of chi-square (nR2) is greater than critical value (16.919). So we
reject Ho and conclude that there is heteroscedasticity.
d. Obtain White’s heteroscedasticity-consistent standard errors and t values and
compare your results with those obtained from OLS.
Solution:

When you compare this result with the OLS results, you will find that the values of the
estimated coefficients are the same, but their variances and standard errors are different.
As you can see, the standard errors of all the estimated slope coefficients are higher under
the White test procedure, hence |t| are lower, suggesting that
OLS had underestimated the standard errors. This could all be due to heteroscedasticity.
e. If heteroscedasticity is established, how would you transform the data so that in
the transformed data the error variance is homoscedastic? Show the necessary
calculations.
Solution:
There is no simple formula to determine the exact nature of heteroscedasticity in the
present case. Perhaps one could make some simple assumptions and try various
transformations. For example, if it is believed that the “culprit” variable is HP, and if we
believe that the error variance is proportional to the square of HP, we could divide through
by HP and see what happens. Of course, any other regressor is a likely candidate for
transformation.