Economics 30331 Prof. Kasey S.

Buckles
Problem Set 3
Due at the beginning of class October 9, 2017

You are encouraged to work in groups of up to four people, and only one assignment has to be turned
in for the entire group. Putting your name on the group’s submission means that you participated in
the answering of each question, and that you understand each answer your group has given.

Part I. Briefly answer each short answer question.

1. [20 points] Suppose an econometrician has a data set containing these variables for 935 men:
wage monthly earnings
educ years of education
exper years of work experience
black =1 if black (for simplicity, assume the alternative is “white”)
south =1 if live in south
lwage natural log of wage
blksouth =black*south
educsq =educ*educ
expersq =exper*exper

The econometrician has produced the following Stata output, some of which I have blanked out:

Source | SS df MS Number of obs = 935

---------+----------------------------- F( 5, 929) = 41.10
Model | 5 6.00097146 Prob > F = 0.0000
Residual | 135.651437 929 .14601877 R-squared = 0.1811
---------+----------------------------- Adj R-squared = 0.1767
Total | 165.656294 934 .177362199 Root MSE = .38212

------------------------------------------------------------------------------
lwage | Coef. Std. Err.
---------+-------------------------------------------------------------------
educ | .0702101 .0065104
exper | .0189559 .0032128
south | -.0895128 .0293404
black | -.0814831 .0604012
blksouth | -.1763696 .0781723
_cons | 5.669516 .1120839
------------------------------------------------------------------------------
a) Write down the population model being estimated, in terms of the unknown parameters, β0
β1, β2, β3, β4, and β5.

b) The econometrician is not sure whether the interaction of black and south belongs in the
model. Assuming a 2-sided alternative, write down the null and alternative hypotheses in
terms of the unknown parameter. At the 5% level, can you reject that the interaction does not
belong?

c) Holding constant education and experience, what is the estimated percentage difference in
wages between a southern white man and a non-southern white man? Between a non-
southern black man and a non-southern white man? Between a southern black man and a
non-southern white man? Make clear how you obtained your answers.
 d) Suppose that the econometrician is concerned that the true model should be: lwage = β0 +
β1educ + β2exper + β3south + β4black + β5black*south + β6black*educ + β7black*exper + u
What is the marginal effect of an extra year of education in this model?

e) State the null hypothesis that the model of wage determination is the same, regardless of
race. Clearly describe how to test this null hypothesis using a Chow test. Be specific about
what the number of exclusions and degrees of freedom are, and identify the critical value for
a 5% test.

2. [10 points]
a.) Consider the population model: cigs = β0 + β1age + β2agesq+ u, which has been estimated
below. Cigs is number of cigarettes smoked per day, and age and agesq specify a quadratic in
the person’s age.
Source | SS df MS Number of obs = 807
-------------+------------------------------ F( 2, 804) = 13.92
Model | 5077.47157 2 2538.73579 Prob > F = 0.0000
Residual | 146676.211 804 182.433099 R-squared = 0.0335
-------------+------------------------------ Adj R-squared = 0.0311
Total | 151753.683 806 188.280003 Root MSE = 13.507

------------------------------------------------------------------------------
cigs | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | .7366959 .1524862 4.83 0.000 .4373778 1.036014
agesq | -.0084581 .0016463 -5.14 0.000 -.0116896 -.0052266
_cons | -4.860589 3.161554 -1.54 0.125 -11.06646 1.345284
------------------------------------------------------------------------------
What is the marginal effect of age on cigarettes smoked? At what age is cigarettes per day
maximized?

b.) Now consider the population model cigs = β0 + β1educ + β2income + β3educinc + u, which
has been estimated below. Educ is education in years, income is annual income in dollars, and
educinc is an interaction of these two terms.

Source | SS df MS Number of obs = 807

-------------+------------------------------ F( 3, 803) = 4.37
Model | 2436.51604 3 812.172014 Prob > F = 0.0046
Residual | 149317.167 803 185.949149 R-squared = 0.0161
-------------+------------------------------ Adj R-squared = 0.0124
Total | 151753.683 806 188.280003 Root MSE = 13.636

------------------------------------------------------------------------------
cigs | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
educ | .5026556 .363721 1.38 0.167 -.2113005 1.216612
income | .0006577 .0002156 3.05 0.002 .0002345 .0010808
educinc | -.0000445 .0000171 -2.59 0.010 -.0000781 -.0000108
_cons | .8475911 4.286481 0.20 0.843 -7.566439 9.261621
------------------------------------------------------------------------------

What is the marginal effect of income on cigarettes smoked? How do you interpret this marginal
effect? At what education level does the predicted effect of income on cigarettes smoked
become negative?
Part II. Stata Problems. You will want to create a log file to record your work. You should
delete errant commands and output from the log file, and type in your answers and explanations
to produce one concise answer sheet for the group. The font for your submitted log file should
be Courier 9 pt so that the columns line up, and your log file should not have the
formatting text in it.

3. [20 points] This problem uses the Stata data set fringe.dta that is available on our course web
page. Be sure to look carefully at the labels and make sure you understand what each of the
variables we’ll be using represents before attempting the problem.

a) Estimate the following model, where I have used the variable names from the data set:

annhrs = β0 + β1 exper + β2expersq + β3educ + β4depends + β5married + β6male + u

b) At what level of experience is annhrs maximized?

c) Now estimate the model from a) using robust standard errors. Comment on the differences in
the coefficients and standard errors. Pay particular attention to whether the statistical
significance of the variables has changed at conventional levels.

d) Perform the White Test for heteroskedasticity in the error terms of this model. What is the
null hypothesis of this test? Do you reject or fail to reject the null at the 5% level?

4. [15 points] This problem uses nbasal.dta, which is a sample of NBA players. It is available
under the “More Data” heading on our web page.

a) LeBron makes a bet with DeMarcus that NBA forwards average more points per game than
do NBA centers. To settle the bet, an economist plans to estimate a model of points per game as
a function of position, years of experience in the NBA, years of experience in college, and talent
as measured by draft position. Write down the appropriate null and alternative hypotheses to
settle this bet and estimate the model. Assuming a 5% significance level, who would win the
bet, based on these estimates? Explain. [HINT: When stating the alternative hypothesis,
remember that LeBron’s bet is that forwards score more points than centers. Also, you should
estimate the model with all three positions included in the sample (guards, centers, forwards).]

b) Before reporting back, you realize that you should consider the possibility of
heteroskedasticity. Carry out a Breusch-Pagan test on the estimated model. Can you reject the
null of homoskedasticity?

c) To be safe, you decide to re-estimate the model with standard errors that are robust to arbitrary
forms of heteroskedasticity. Again assuming a 5% significance level, who would win the bet
based on these robust estimates?