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EC 351 001: Econometrics I

TEST 1

February 11, 2011

100 points

Instructions: Provide all answers on this exam paper. You must show all work to receive credit.
You are allowed to use your one page cheat sheet on this exam, provided that they are written in
your own handwriting. Make your final answer clear in order to receive full credit. Allocate
your time appropriately across all questions and make sure to finish within the time limit of 60
minutes. Question values are shown beside each question.

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 1. As a small business owner, Joe the Plumber is trying to understand two variables:
Revenue and Cost. Suppose that revenue is normally distributed with N(10,25) and cost is
normally distributed with N(8,9). Economists define Profit as Revenue minus Cost.
(Hint: To apply the appropriate formula, following the notation in your book, use
a 1 and b 1.)
a. (5 points) What is the distribution of the Profit variable if Revenue and Cost are
independently distributed?

Answer: E(Profit) = E(Revenue) E(Cost) = 10 8 = 2

Var(Profit) = Var(Revenue) + Var(Cost) = 25 + 9 = 34

N(2,34)

b. (5 points) What is the distribution of the Profit variable if the correlation between
Revenue and Cost is 0.25?

R ,C
Corr ( R, C )
R C
R ,C
Answer: 0.25
100 * 100
R ,C 0.25*10*10 25

Sigma_R,C = .25*5*3=3.75

E(Profit) = E(Revenue) E(Cost) = 10 8 = 2

Var(Profit) = Var(Revenue) + Var(Cost) - 2*Cov(R,C) = 25 + 9 - 2*3.75 = 26.5

N(2,26.5)

c. (3 points) What is the probability that profit exceeds 4?

.3483. standardize the rv, critical value is .3885

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 2. . (10 points) Based on a sample of 100 observations, you find an average of 25 and a
standard deviation of 18. If you believe that the average in the entire population is 22 and
population variance is 16, find Pr(23 Y 24).

Pr(23 Y 24) Pr(Y 24) Pr(Y 23)

24 22 23 22
Pr( Z ) Pr( Z )
Answer: 12 / 100 12 / 100
Pr( Z 1.67) Pr( Z 0.83)
0.9525 0.7967 0.1558

Instead of 12, we use 16. P= P(z<1.25)-P(z<.625)=.8944-.7357=.1587

I changed the numbers to percentage but the final answer should be the same.

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 3. Visiting two recent American Youth Soccer Organization under 12 year old soccer
matches on a Saturday, you observe the following heights of boys and girls:

Height of Young Boys and Girls, Grades 4-6, in inches

Boys Girls
YBoys sBoys nBoys YGirls sGirls nGirls
57.8 3.9 55 58.4 4.2 57

a. (5 Points) Let your null hypothesis be that there is no difference in the height of females
and males at this age level. Specify the null and the two-sided alternative hypothesis.

Answer: H 0 : Boys Girls 0 vs. H1 : Boys Girls 0

b. (5 Points) Find the difference in height and the standard error of the difference.

s 2 Boys s 2Girls 3.92 4.22

Answer: YBoys YGirls = -0.6, SE( YBoys YGirls ) = = 0.77.
nBoys nGirls 55 57

c. (5 Points) Generate a 95% confidence interval for the difference in height.

Answer: YBoys YGirls CV SE(YBoys YGirls ) -0.6 1.96 0.77 = (-2.11, 0.91).

d. (7 Points) Calculate the t-statistic for comparing the two means. Is the difference
statistically significant at the 1% level?

Answer: t = -.6/.77=-0.78, so | t | < 2.58(need to give two sided (df inf) 1% 2.58, 5%
1.96 , 10% 1.64 critical value to students, or simply give them tables 1 and 2),
which is the critical value at the 1% level. Hence the difference is not
statistically significant and you cannot reject the null hypothesis. Therefore,
you cannot discern any difference between the heights of boys and girls.

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4. (15 Points) You have collected weekly earnings and age data from a sub-sample of 1,744
individuals using the Current Population Survey in a given year. For these individuals,
you find a mean of $434.49 and a standard deviation of $294.67, construct a 95%
confidence interval for average earnings in the entire population. If you constructed a
90% confidence interval instead, would it be smaller or larger?

sY 294.67
Answer: The confidence interval is Y CV 434.49 1.96
n 1744
= 434.49 13.82989 = (420.66, 448.32). The interval estimate for the average
earnings lies between $420.66 and $448.32. For a 90% confidence interval, the
only change in the calculation of the confidence interval is to replace 1.96 by
1.64. Hence the confidence interval is smaller. A smaller interval implies, given
the same average earnings and the standard deviation, that the statement will be
false more often. The larger the confidence interval, the more likely it is to
contain the population mean.

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5. Previous research suggests that employees contribute, on average, $240 per month to their
retirement program. You wonder whether contributions are less in recessions and collect
data on 200 employees and their contributions during a recession. For these employees, you
find an average contribution of $237 with a standard deviation of $52.
a. (5 points) What are the hypotheses of interest here? Use the notation that we used
in class.

Answer: H 0 : Y 240, H1 : Y 240

b. (5 points) What is the p-value and what do you conclude at the 1% significance
level?

237 240
t 0.82
52
Answer: 200
p 1* Pr( Z 0.82 ) 1*0.2061 0.2061
Fail to reject the null and conclude that we cannot say that contributions are lower than $240
in the population

c. (7 points) Construct a 90% confidence interval for the sample mean. Interpret.

52
Answer: CI : 237 1.645* 237 6.05 [$230.95,$243.05]
200
In 90% of samples, this confidence interval will contain the true population mean.

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6. (5 points) Describe what is BLUE (best linear unbiased estimator).