COLLEGE OF BUSINESS
STA 3201: INTRODUCTION TO ECONOMETRICS
CAT 2
DATE: NOVEMBER 2021
TIME: 1 HOUR 50 MINUTES
Answer BOTH Questions
Use your own hand writing, then attach a pdf copy
You may use a statistical software where appropriate
QUESTION ONE
(15MARKS)
a) Consider the estimated demand for tea in England
𝑌 = 9.1 + 7.8𝑃𝑂 + 2.4𝑃𝐶 + 0.0035𝑀
SE
(15.6) (1.2)
(0.001)
2
R = 0.60
n=25
Where Y is quantity of tea consumed, 𝑃𝑂 is price of Kenya coffee 𝑃𝐶 is price of coffee and
M is income
(i) Establish the statistical significance of the price and income coefficients
(ii) Interpret the coefficients of 𝑃𝑂 , 𝑃𝐶 and M. Are the signs consistent with economic
theory?
(iii)The researcher suspects the model may be mispecified and she includes the price of
Indian tea (𝑃𝐼 ) in the equation and obtains
𝑌 = 10 + 8𝑃𝑇 + 5.6𝑃𝑂 + 2.4𝑃𝐶 + 0.003𝑀
SE
(4.0)
R = 0.65
2
(2.0) (1.3)
n=25
(0.001)
On the basis of the answers in (iii) would you conclude that the initial estimated model
was mispecified? What was the nature of the specification error?
QUESTION TWO
(15MARKS)
a)A study analyzed the effect of military expenditures (M) and GNP (Y) on aggregate private
consumption (C ). The estimated equation is:
𝐶 = 26.19 + 0.6248𝑌 − 0.4398𝑀
SE = (2.73)
(0.006)
(0.0736)
R2=0.999 n=30
i)If heteroscedasticity is a problem, does it affect the coefficients or their variances?
What is the consequence?
ii)Explain how in practice the researcher can test for heteroscedasticity using the white
test.
b)A researcher obtained the following regression results
𝑌 = 389.6 + 60.8𝑋1 − 36.5𝑋2 + −0.061𝑋3
Se
(10.3)
(13.2)
(0.043)
Where Y is diesel consumption in Machakos County in litres, 𝑋1 is urban highways in the county,
𝑋2 is diesel tax rate in the county and 𝑋3 is diesel motor vehicle registrations in the county in
thousands.
(i) Is there multicollinearity in the regression? How do you know?
(ii) Explain how in practice the researcher can test for multicollinearity