Lahore School of Economics

BSc ECONOMETRICS II
Spring 2013
Problem set No.3

Due Date: Monday, 27
th
Jan 2014 in class. Students may work together on problem sets, with a maximum of
three students per group. However, each student in the group must turn in their OWN responses to the problem set
(i.e. one assignment with three names on it will not be accepted). The groups assignments should be turned in stapled
together.
Question 1:
(Linear Probability Model) Below is the results obtained by Cohen, Rea and Lerman (1970) based on a
linear probability estimation of the factors that affect female labor force participation in the US


a) What is the economic interpretation of the coefficient of 65 and over? (Make sure to
identify the base category and use this base category in your economic interpretation).








b) What is the economic interpretation of 16 and over? (Make sure to identify the base
category and use this base category in your economic interpretation).









c) What is the economic interpretation of the coefficient of the interaction term of the
variables Never Married and 65 and over?








d) What is the economic interpretation of the coefficient of the interaction term of the
variables Age and Years of Schooling?














e) What is the conditional probability of a woman working for a married woman (listed as
other in the table), aged 22 to 54, with 12 to 15 years of schooling, with an unemployment
rate of 2.5-3.4 percent relative employment opportunities of 74 percent and over and
FILOW of &7500 and over?






Question 2:
(Linear Probability Model) Based on a pooled time series and cross-sectional data of 200 Aa (high-
quality) and BAA (medium-quality) bonds over the period 1961 1966, Joseph Cappelleri estimated
the following bond rating prediction model.

a) A priori, why are
2
and
4
expected to be negative?





b) A priori, why are
3
and
5
expected to be positive?






c) Give economic interpretations of all the slope coefficients in the regression results above




















Question 3:
(Binomial Logit Model) Suppose an econometrician ran a regression to check the effect of personalized
system of instruction on course grades. The dependent variable used is the students final grade in an
intermediate microeconomics course, with Y = 1 if the grade is an A and equal to zero if the final
grade was a B or a C.

The independent variables used are:
GPA: the entering grade point average
TUCE: score on an examination given at the beginning of the term to test entering knowledge of
macroeconomics
PSI= 1 if the new teaching method is used and 0 otherwise

The table below gives us the regression results

a) What is the conventional measure of goodness of fit used in regression results? Why is it
not used here?



b) Give interpretation of the slope coefficient of GPA.




c) Which coefficients are significant at 1%, 5% and 10% significance level?






d) What is the interpretation of the PSI coefficient in terms of odds?





e) What is the probability of getting an A grade for a student who does not use the new
teaching method and has a GPA = 3.92 and TUCE grade= 29?




Question 4:
(Identification Problem) Consider the following extended Keynesian model of income determination:
Consumption function: Ct = 1 + 2Yt 3Tt + u1t
Investment function: It = 0 + 1Yt1 + u2t
Taxation function: Tt = 0 + 1Yt + u3t
Income identity: Yt = Ct + It + Gt
where C = consumption expenditure
Y = income
I = investment
T = taxes
G = government expenditure
us = the disturbance terms
By applying the order condition, check the identifiability of each of the equations in the
system.













Question 5:
(Reduced form Equation) Obtain the reduced form of the IS model given below.

where Y = national income
C = consumption spending
I = planned or desired net investment
G = given level of government expenditure
T = taxes
Yd = disposable income
r = interest rate.