Homework 1 ECN 214 – Econometrics Professor Mathes Due February 9, 2023 1. Let X be a random variable distributed as Normal(5,4). Find the probabilities of the following events: a. P(X ≤ 6) b. P(X > 4) c. P(|X – 5| > 1) 2. Much is made of the fact that certain mutual funds outperform the market year after year (that is, the return from holding shares in the mutual fund is higher than the return from holding a portfolio such as the S&P 500). For concreteness, consider a 10-year period and let the population be the 4,170 mutual funds reported in The Wall Street Journal on January 1, 1995. By saying that performance relative to the market is random, we mean that each fund has a 50-50 chance of outperforming the market in any year and that performance is independent from year to year. a. If performance relative to the market is truly random, what is the probability that any particular fund outperforms the market in all 10 years? b. Of the 4,170 mutual funds, what is the expected number of funds that will outperform the market in all 10 years? c. Find the probability that at least one fund out of 4,170 funds outperforms the market in all 10 years. What do you make of your answer? 3. Suppose that at a large university, college grade point average, GPA, and SAT score, SAT, are related by the conditional expectation E(GPA|SAT) = 0.70 + 0.002 SAT. a. Find the expected GPA when SAT = 800. Find E(GPA|SAT = 1400). Comment on the difference. b. If the average SAT in the university is 1,100, what is the average GPA? (Hint: Use Property CE.4.) c. If a student’s SAT score is 1,100, does this mean he or she will have the GPA found in part (ii)? Explain. ****We have not explicitly discussed these next question topics in class. Please see me in office hours or by appointment if you’re having trouble**** From Math Refresher C 4. You are hired by the governor to study whether a tax on liquor has decreased average liquor consumption in the state. You are able to obtain, for a sample of individuals selected at random, the difference in liquor consumption (in ounces) for the years before and after the tax. For person i who is sampled randomly from the population, 𝑌𝑖 denotes the change in liquor consumption. Treat these as a random sample from a Normal(µ,𝜎 2 ) distribution. a. The null hypothesis is that there was no change in average liquor consumption per year. State this formally in terms of µ. b. The alternative is that there was a decline in liquor consumption per year; state the alternative in terms of µ. c. Now, suppose your sample size is n = 900 and you obtain the estimates 𝑦̅ = -32.8 and s = 466.4. Calculate the t-statistic for testing 𝐻0 and 𝐻1 ; obtain the p-value for the test. (Because of the large sample size, just use the standard normal distribution tabulated in Table G.1.) Do you reject 𝐻0 at the 5% level? At the 1% level? d. Would you say that the estimated fall in yearly consumption is large in magnitude? Comment on the practical versus statistical significance of this estimate. e. What has been implicitly assumed in your analysis about other determinants of liquor consumption over the two-year period in order to infer causality from the tax change to liquor consumption? 5. Suppose that between their first and second years in college, 400 students are randomly selected and given a university grant to purchase a new computer. For student I, 𝑦𝑖 denotes the change in GPA from the first year to the second year. If the average change is 𝑦̅ = 0.132 with standard deviation s = 1.27, is the average change in GPAs statistically significant?
