Department of Econometrics and Business Statistics

ETF2100/5910: Introductory (Applied) Econometrics

Assignment 2 Semester 1, 2018
Worth 10% of the Final marks
Due Date: Monday May 7, 4pm
PLAGIARISM AMOUNTS TO CHEATING UNDER PART 7 OF THE MONASH UNIVERSITY
REGULATION. DO NOT COPY ASSIGNMENTS!

Note:
 Students need to submit online and hard copy to the tutor’s mailbox on level 5 Building
H.
 Notation used in the assignment needs to be written correctly and properly.
 This assignment comprises three questions. ETF2100 students do Questions 1, 2 and
3 (Part 1). ETF5910 students do all questions.
 Mark allocations are given for each question. Marks are also awarded for
presentation.
 Total marks for ETF2100 and ETF5910 students are 80 and 95, respectively.
 Marks will be deducted for late submission on the following basis:
10% for each day late, up to a maximum of 3 days.
Assignments more than 3 days late will not be marked.
 This assignment covers up to the end of Topic 7 (Using Indicator Variables).
Question 1 (40 marks)
There is a belief that sleep is important because of its impact on wages through the labour-
market productivity. The Excel file sleep.xlsx contains 706 individuals and is a subset of the
data used by Biddle and Hamermesh (1990), “Sleep and the Allocation of Time,” Journal of
Political Economy, 98, 1, pp 922-943. The list of variables is:
sleep minutes sleep at night per week
totwrk minutes worked per week
age age in years
male =1 if male
educ years of schooling
kid =1 if there present children under 3 years of age
inlf =1 if in labour force

Consider the following model that relates number of minutes sleeping on time spent working
and other factors that may be affecting sleep.
sleepi  1  2totwrki  3educi  4agei  5agei2  6kid i  7inlf i  8malei  ei

(a) Explain the reason why we include the variables age and age2 in the model. What
signs would you expect for  4 and  5 ? (3 marks)
(b) Explain briefly what signs you would expect for all other coefficients? (4 marks)
(c) Estimate this function and report the results. (3 marks)
(d) Interpret the estimated coefficients for  2 and  6 . Do the results make sense?
(4 marks)
(e) Compute a 95% interval estimate for  3 . What does this interval tell you? (4 marks)
(f) Using a 5% significance level, test whether age helps explaining how long people sleep.
(4 marks)
(g) Is there evidence that men sleep more than women? How strong is the evidence? Justify
your results using significance levels of 0.05 and 0.01. (5 marks)
(h) Determine whether there is a significant relationship between sleep and totwrk , educ,
age, age2 , kid , male and inlf jointly using the 0.05 level of significance. (4 marks)
(i) If a person works five more hours per week, by how many minutes is sleep predicted
to fall? Is this a large tradeoff? (4 marks)
(j) Based on the significance of the coefficients, are there any variables that you might
exclude from the equation? Why? (5 marks)
Question 2 (28 marks)
The sleep equation in Question 1 is now rewritten as:
sleepi  1  2totwrki  3educi  4kidi  ei (2.1)
(a) Estimate this equation separately for men and women and report that results the usual
way. Are there any notable differences in the two estimated equations? (8 marks)
(b) Compute the Chow test for equality of the parameters in the sleep equation for men and
women. Set up the equations for men and women, specify the hypotheses to be tested,
define the test statistic and perform the test. (7 marks)
(c) Equation (2.1) is now rewritten as:
sleepi  1   2totwrki  3educi   4kid i  5malei   2  malei  totwrki  
(2.2)
3  malei  educi   4  malei  kid i   ei

Explain the reason why we add the interaction terms. (3 marks)

(d) Estimate the equation (2.2) and report the results. Comment on the significance of the
coefficients. (6 marks)
(e) Determine whether 2 , 3 and 4 are jointly significant. (4 marks)

Question 3 (12+15 marks)

Part 1
The file house.xlsx contains data on 1500 houses sold in a big city during 1996-1998. Variable
descriptions are:
price = house price in dollar
sqft = total living area (total size) of the house in hundreds of square feet
beds = number of bedrooms
baths = number of bathrooms
age = age in years
vacant =1 if yes, =0 otherwise
(a) Estimate the following model. Report the results and comment on the signs and
statistical reliability of the estimates. (5 marks)
pricei  1  2 sqfti  3agei  4bedsi  5bathsi  ei (3.1)
(b) Does RESET suggest that the model is a reasonable one? Explain. (7 marks)

Part 2 For ETF5910 students only

(c) John wants to buy a house. He is considering two that have the same living area, the
same number of bathrooms, and the same number of bedrooms. One is two years old
and the other is ten years old. What price differences can he expect between the two
houses? What is a 95% interval estimate for this difference. Is this interval estimate
useful? (8 marks)
(d) Lisa’s house has a living area of 2000 square feet. She is planning to extend her living
room by 200 square feet. What is the expected increase in price she will get from this
extension? Test as an alternative hypothesis that the increase in price will be more than
$20,000. Use   0.05 . (7 marks)