MAF356 Analytical Methods in Economics and Finance; Trimester 3, 2011.

ASSIGNMENT 1: Due date Week 10 Monday 23rd January 5pm. Word Limit Maximum 1000 words excluding appendices, figures and tables Weight: 15% In economics, we believe that people will, in general, want to maximise their utility i.e. people want to be satisfied and will try to maximise their satisfaction in life. Much research has been done in this particular area of economics and in particular, researchers are often interested in examining what sort of factors play a role in determining life satisfaction, based on empirical data. In this assignment, you are required to examine the determinants of life satisfaction using a dataset from the Australian Centre on Quality of Life (ACQOL) database. This data is provided in the file MAF356 Assignment.XLSX. The data in this file comes from a survey conducted by in 2007 by and contains 1,660 individual observations on various variables. The definition and details of these variables are as follows and the actual survey questionnaire is attached at the end of this file.

LIFESAT = Life Satisfaction score from 0-10 (you can think of this as how happy a person is). MEDCON = Medical condition of the person measured in number of years ill (0 = no illness). HRSWORK = The number of hours a person does paid work per week (0 = no work). GENDER = Takes a value of 0 if male and 1 if female. AGE = The age of the person measured in years. ALONE = Takes a value of 0 if the person lives with others and 1 if the person lives alone. INCOME = Represents the persons annual household income (see the table at the end of this file)

Part A:
Using Excel, compute the descriptive statistics (mean, max, min, variance) for the variable LIFESAT for the following below. i) ii) iii) Males and Females Those who live alone vs. those who dont live alone. Those in income category 1 vs. those in income category 6.

Briefly discuss any important differences between the results in each group. Do the differences accord with your a priori expectations? Explain. [2 + 2 + 2 = 6 Marks]

Part B:
Estimate the following population regression functions using Ordinary Least Squares (OLS). i) ii) iii) iv)

For each part, present your estimated sample regression function and briefly discuss whether or not was different to what you had expected? [2 + 2 + 2 + 2 = 8 Marks]

Part C:
Estimate the following multiple regression model:

Carefully present your estimated sample regression function and interpret each of your regression coefficients. [2 + 1 + 7 = 10 Marks]

Part D:
i) For a hypothetical male who is aged 26, has no medical condition, lives alone and makes $75,000 per year working 50 hours per week, estimate their life satisfaction score based on your results from Part (C). If the person in part i) got married and moved in with his wife at aged 35, what would his life satisfaction score be now given everything else was the same?

ii)

Please show all your calculations. [2 + 2 = 4 Marks]

Part E: Looking at the population regression function specified in Part (C) what other variables do you think can be used in this model to explain life satisfaction. Justify your choice of variables. [2 + 2 = 4 Marks]

Part F: Calculate the sum of squared residuals for the estimated multiple regression model in Part (C). Choose some other estimator or make up any other set of estimates for your coefficients (i.e. change and ). Re-calculate the new sum of squared residuals based on your new coefficients. What can you conclude about the original sum of squared residuals and the new sum of squared residuals? [2 + 2 + 4 = 8 Marks]

Part G:
Discuss the statistical significance of each estimated coefficient in the multiple regression model for Part (C). Comment on the overall significance of the model. Show your calculations/workings for all the tests involved in this question. [7 + 3 = 10 Marks]

Notes: This is an individual assignment. All Excel worksheets excluding the original data should be attached at the end of your submitted hard copy assignment. These should clearly demonstrate the work undertaken independently by each student. Submissions should be made both in hardcopy (report only) and online on D2L (report and excel files). On-campus students must submit to the campus specific faculty office while the off campus students should mail the assignments to the Division of Student Affairs (DSA) or contact DSA for submissions (visit http://www.deakin.edu.au/current-students/study-information/examsassessment/assignments.php).

Data Dictionary Variable ID Survey Question Asked

Case number id

Value labels

LIFESAT

Thinking about your own life and personal circumstances, how satisfied are you with your life as a whole?

Scored:0-10 0 = completely dissatisfied 10 = completely satisfied

MEDCON

Do you have a medical or psychological condition that makes you visit the doctor on a regular basis? If so, how long have you had this condition?

Duration of illness in years, 0 = no illness

HRSWORK How many hours each week do you normally spend on paid
work?

0 = does not do paid work.

GENDER

Gender of participant

0 = male 1 = female

AGE ALONE

Age of participant

Do you live by yourself?

1 = live by themselves 0 = lives with others

INCOME

Can you please give me an idea of your households total annual income before tax?

0 = <$15,000 1 = $15,000-$30,000 2 = $31,000-$60,000 3 = $61,000$100,000 4 = $100,000$150,000 5 = $151,000$250,000 6 = $251,000$500,000 7 = >$500,000