LAHORE UNIVERSITY OF MANAGEMENT SCIENCES B.Sc.

(Honours) Programme
ECON 413: APPLIED MICROECONOMICS

Spring 2007
Professor Abid A. Burki Department of Economics Room 248 Meetings: Tue and Thu, 1145 1325 Office Hours: Mon and Wed, 1430 1630 Course Description: Lawrence Klein once observed that econometrics recognizes that social behavior is exceedingly complex and that a limited number of variables related together in fairly simple and elegant equations cannot explain the whole of such truth. In a typical classroom setting it is tempting to focus entirely on econometric theory and to loose sight of the underlying goals of the theory, namely to increase understanding of the human behavior by applying these tools. This course is structured to provide students with hands-on experience of implementing econometric techniques with real world data. The course assumes understanding of basic tools of econometric theory and microeconomics. Among the topics covered are applications of simple and multiple regressions into costs, learning curves, and scale economies; measuring wage discrimination by applying dummy variables; consumer demand models using single equation and systems of equations; factor demand elasticities and elasticities of substitution with flexible functional forms and equation systems; stochastic frontier and technical efficiency; labor supply and applications of limited dependent variable procedures; and applications of labor supply models to panel data models. There is no single textbook for the course. Most of the readings are chapters in books or journal articles. Some readings are drawn from: 1Berndt, Ernst R. (1991). The Practice of Econometrics: Classic and Contemporary. Reading: AddisonWesley Publishing Company. Capalbo, Susan M. and John M. Antle, eds. (1988). Agricultural Productivity: Measurement and Explanation. Washington, D.C.: Resources for the Future. Deaton, Angus and John Muellbaer (1980). Economics and Consumer Behavior. Cambridge: Cambridge University Press. Hill, R. Carter, William E. Griffiths and George G. Judge (2001). Undergraduate Econometrics. Second Edition. New York: John Wiley & Sons, Inc. Chapter 7 & Chapter 8. Grading: The course grade depends on assignments (30%), final exam (30%) Research Project (40%) Phone: 5722670-79, Ext. 2248 E-mail: burki@lums.edu.pk Web: http://ravi.lums.edu.pk/burki

Syllabus and Reading Assignments

1. 1Introduction Introduction to the course; required computer software; economic model vs. econometric model; simple linear regression model and inference; multiple regression model; application and hands-on exercises. Hill, R. Carter, William E. Griffiths and George G. Judge (2001). Undergraduate Econometrics. Second Edition. New York: John Wiley & Sons, Inc. Chapter 7 & Chapter 8. 2. Applications of Simple and Multiple Regressions to Costs and Learning Curves Econometric issues encountered in estimating the cost effects of scale economies and learning curves. This will help to understand differences between simple and multiple regressions, to assess the effects of incorrectly omitting variables from a regression equation, and to implement alternative ways of testing hypotheses. Hands on with costs, learning curves, and scale economies. Berndt, Ernst R. (1991). Costs, Learning Curves, and Scale Economies. The Practice of Econometrics: Classic and Contemporary. Chapter 3, 60 101. 3. Measuring Wage Discrimination: Dummy Variables in Regression Models The human capital model; issues in econometric implementation of the human capital model; determinants of wages and estimating the wage effects of discrimination. Hands-on with estimating determinants of wages and earnings. Berndt, Ernst R. (1991). Analyzing Determinants of Wages and Measuring Wage Discrimination: Dummy Variables in Regression Models. The Practice of Econometrics: Classic and Contemporary. Chapter 5, 150-223. Taylor, L.L. (2007). Comparing Teacher Salaries. Economics of Education Review. (Forthcoming) 4. Consumer Demand Models: Single Equation vs. Systems of Equations The theory of the household; double log model; Stones approach to demand models; Linear Expenditure System; the Rotterdam model; the almost ideal demand system; applications to time-series data. Burki, Abid A. (1997). Estimating Consumer Preferences for Food Using Time-series Data of Pakistan. Pakistan Development Review. 36(2), 131 153. Deaton, Angus and John Muellbaer (1980). Economics and Consumer Behavior. Cambridge: Cambridge University Press. Gundimeda, H., and G. Kohlin (2006). Fuel Demand Elasticities for Energy and Environmental Policies. Energy Economics. Hill, R. Carter, William E. Griffiths and George G. Judge (2001). Undergraduate Econometrics. Second Edition. New York: John Wiley & Sons, Inc. 353 357. Johnson, S.R., Zuhair A. Hassan and Richard D. Green (1984). Demand Systems Estimation: Methods and Applications. The Iowas State University Press.

5. Theory of the Firm: Estimating Factor Demand Elasticity in Systems of Equations The theory of the firm; hands on estimation of demand for factors of production using Cobb-Douglas and CES production functions and interpretation of parameters. Duality and flexible functional forms, generalized Leontief cost function, the translog specification, and measuring total factor productivity growth. Applications to Berndt-Wood KLEM data for U.S. manufacturing sector. Comparison of equation-by-equation and IZEF procedures, substitution elasticities and curvature checks. Berndt, Ernst R. (1991). Modeling the Interrelated Demands for Factors of Production: Estimation and Inference in Equation Systems. The Practice of Econometrics: Classic and Contemporary. Chapter 9, 449 506. Capalbo, Susan M. and John M. Antle (eds.). Agricultural Productivity: Measurement and Explanation. 74 82, 159 - 188. 6. Stochastic Frontier and Technical Efficiency Defining technical efficiency of firms, description of stochastic frontier model, composed error structure and distributional assumptions, estimation of mean technical efficiency, and determinants of efficiency. Hands-on estimation of stochastic frontier model with data from Pakistans banking sector. Aigner, D., C.A. Knox Lovell, and P. Schmidt (1977). Formulation and Estimation of Stochastic Frontier Production Function Models. Journal of Econometrics. 6, 21 37. Coelli, T., D.S.P. Rao and G. Battese (1998). An Introduction to Efficiency and Productivity Analysis. Kluwer Academic Publishers. 183 198. 7. Labour Supply: Applications of Limited Dependent Variable Procedures Models with discrete dependent variable, the Probit model, hypothesis tests in Probit model, the Logit models, the Tobit models, applications to labor supply, selectivity issues. Applications to Mroz data set on female labor supply in the U.S. Berndt, Ernst R. (1991). Whether and How Much Women Work for Pay: Applications of Limited Dependent Variable Procedures. The Practice of Econometrics: Classic and Contemporary. Chapter 11. 593-680. Mroz, Thomas A. (1987). The Sensitivity of an Empirical Model of Married Womens Hours of Work to Economic and Statistical Assumptions. Econometrica. 55(4): 765-799. 8. Labor Supply: Applications of Panel Data Models Panel data models; pooled model; fixed effects and random effects models; estimation of pooled, fixed effects and random effects models with applications to Ziliak (1997) data on male labor supply in the US; Hausman specification test. Gujrati, Damodar N. (2004) Basic Econometrics. Fourth Edition. McGraw Hill. 632 655. Ziliak, J.P. (1997). Efficient Estimation with Panel Data When Instruments are Predetermined. Journal of Business and Economic Statistics, 15, 419 431.

Tentative Course Schedule and Reading Assignments

Session 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Topic Introduction -doCosts and Learning Curves -doMeasuring Wage Discrimination: Dummy Variables in Regressions -doConsumer Demand Models: Single Equation vs. systems of equations -do-do-doTheory of the Firm: Factor Demand Elasticity -do-do-doStochastic Frontier and Technical Efficiency -do Labor Supply: Applications of Limited Dependent Variable Procedures -do Labor Supply: Applications of Panel Data Regression Models -doFinal Examination

Reading Assignments* Hill et al. (2001), 145 198

Berndt (1991), 60 101

Berndt (1991), 150 223

Deaton and Muellbaur, 60 85

Berndt (1991), 449 506

Aigner et al. (1978), 21 37 Coelli et al. (1998), 183 198

Berndt (1991), 593 680

Gujarai (2004), 632 655

Additional readings may be assigned if necessary.