Economics

Instructions to students:
x No candidate will be permitted to leave within the first hour or the last half hour of this exam.
x Both entry and exit to the examination hall shall be at the absolute discretion of the invigilator.
x Students should answer 21( TueVtion froP 6eFtion $ and 21( TueVtion froP
6eFtion %
Materials supplied:
x 7aEleV 7aEle ‘ 3erFentaJe 3ointV of t ‘iVtriEution on )inal 3aJe
Materials allowed:
x Calculators:
o You may use Business School approved models only: Casio FX-83GT/Casio-83GT+,
Casio FX-85GT/Casio FX-85GT+, Sharp EL531WH, Aurora AX-582BL.
Using exam answer sheets
x Always use a black pen.
x Complete personal information on all white sheets supplied before the exam begins.
x Write your answer to each question on a SEPARATE white answer sheet, using BOTH sides
if required. For this exam, the required number of white answer sheets is .
x Request yellow continuation sheets to continue an answer if one white sheet is not enough.
x Use the standard character set, printed below, when hand writing in data boxes. E.g. Student
ID, Date of Birth, Question Number. Keep your characters inside the boxes.
x You must return all white answer sheets to the invigilator even if you have not attempted all
questions.
• 6tudentV are entitled to uVe a VinJle $ douEleVided VKeet of SreZritten noteV
3
This page has been left blank for student notes – anything written here will not be marked.
Section A
You must answer one question from this section.
You must use ONE WHITE answer sheet per question. To provide an
answer that exceeds the space on the answer sheet, please raise your
hand to request a YELLOW answer sheet.
1. Consider the simple regression with a constant
Yi = ↵ + Xi + ui, i = 1, . . . , n. (1)
1.1. Verify the following numerical properties for the OLS estimator:
(i)
Xn
i=1
uˆi = 0, (ii)
Xn
i=1
uˆiYˆi = 0, (iii)
Xn
i=1
Yˆi = Xn
i=1
Yi
where ˆui = Yi Yˆi, Yˆi = ˆ↵ + ˆXi, and ˆ↵ and ˆ denote the OLS
estimators of ↵ and , respectively. [20%] 1.2. Set = 0 in model (1), that is, consider the model
Yi = ↵ + ui, i = 1, . . . , n. (2)
Assume that ui ⇠ i.i.d.(0, 2), that is, the errors ui are independent
and identically distributed across i, with mean zero and variance 2.
Show that the OLS estimator of ↵, ˆ↵, is equal to Y¯ = n1 Pn
i=1 Yi
and the variance of ˆ↵ is 2/n. [20%] 1.3. Verify which of the numerical properties described in sub-question
1.1. hold for the OLS estimator of model (2). [10%] 2. Let F (FEMALE) be a variable which takes the value “0” for male and
“1” for female. Similarly, the variable M (MALE) takes on the value “1”
for male and “0” for female. Y denotes the Earnings.
For a given parameter ✓, let ˆ✓ denote its OLS estimator.
2.1. Derive the OLS estimators of ↵F and ↵M for the regression model
Yi = ↵F Fi + ↵MMi + ui, i = 1,…,n (3)
Show that ˆ↵F = Y¯F , the average of the Yi’s only for females, and
↵ˆM = Y¯M, the average of the Yi’s only for males. [20%] Continued overleaf
2.2. Consider the regression
Yi = ↵ + Fi + ui, i = 1, . . . , n. (4)
Substitute M = 1 F in (3) and show that ↵ = ↵M and =
↵F ↵M. [10%] 2.3. Derive the OLS estimators of ↵ and for model (4). Show that
↵ˆ = ˆ↵M and ˆ = ˆ↵F ↵ˆM, where ˆ↵F and ˆ↵M have been derived in
sub-question 2.1. [20%] Section B
You must answer one question from this section.
You must use ONE WHITE answer sheet per question. To provide an
answer that exceeds the space on the answer sheet, please raise your
hand to request a YELLOW answer sheet.
3. Consider the following wage-determination equation for the British economy for the period 1950-1969:
W
ct = 8.582 + 0.364 P Ft + 0.004 P Ft1 2.560 Ut
(1.129) (0.080) (0.072) (0.658)
(5)
where
W= wages and salaries per employee.
PF= prices of final output at factor cost.
U= unemployment in Great Britain as a percentage of the total number
of employees in Great Britain.
t= time, measured in years.
The figures in parenthesis are standard errors. The R2 of the regression
is 0.873.
3.1. Interpret briefly the preceding equation. [12.5%] 3.2. What is the rationale for the introduction of P Ft1?. [12.5%] Continued overleaf
3.3. Should the variable P Ft1 be dropped from the model? Explain
your answer [12.5%] 3.4. Suppose that you are asked to estimate the elasticity of wages and
salaries per employee with respect to the price of final output. How
would you modify the regression model (5) to accomplish your task?
[12.5%] 4. Consider the Cobb-Douglas production function
Y = 1L2K3 (6)
where Y= output, L = labour input, and K = capital input.
Dividing equation (6) through by K, we get
(Y/K) = 1 (L/K)
2 K2+31 (7)
Taking the natural log of (7) and adding the error term, we obtain
ln (Y/K) = 0 + 2 ln (L/K)+(2 + 3 1)ln (K) + u (8)
where 0 = ln(1).
4.1. Suppose you had data to run the regression (8). How would you
test the hypothesis that there are constant returns to scale, that is,
(2 + 3) = 1? [17%] 4.2. If there are constant returns to scale, how would you interpret regression (8)? [16%] 4.3. Suppose we divide (6) by L rather than by K. Assuming constant
returns to scale, how would you interpret this regression? [17%] END OF QUESTION PAPER
APPENDIX D: STATISTICAL TABLES 961
TABLE D.2 PERCENTAGE POINTS OF THE t DISTRIBUTION
Example
Pr (t > 2.086) = 0.025
Pr (t > 1.725) = 0.05 for df = 20
Pr (|t| > 1.725) = 0.10
Pr 0.25 0.10 0.05 0.025 0.01 0.005 0.001
df 0.50 0.20 0.10 0.05 0.02 0.010 0.002
1 1.000 3.078 6.314 12.706 31.821 63.657 318.31
2 0.816 1.886 2.920 4.303 6.965 9.925 22.327
3 0.765 1.638 2.353 3.182 4.541 5.841 10.214
4 0.741 1.533 2.132 2.776 3.747 4.604 7.173
5 0.727 1.476 2.015 2.571 3.365 4.032 5.893
6 0.718 1.440 1.943 2.447 3.143 3.707 5.208
7 0.711 1.415 1.895 2.365 2.998 3.499 4.785
8 0.706 1.397 1.860 2.306 2.896 3.355 4.501
9 0.703 1.383 1.833 2.262 2.821 3.250 4.297
10 0.700 1.372 1.812 2.228 2.764 3.169 4.144
11 0.697 1.363 1.796 2.201 2.718 3.106 4.025
12 0.695 1.356 1.782 2.179 2.681 3.055 3.930
13 0.694 1.350 1.771 2.160 2.650 3.012 3.852
14 0.692 1.345 1.761 2.145 2.624 2.977 3.787
15 0.691 1.341 1.753 2.131 2.602 2.947 3.733
16 0.690 1.337 1.746 2.120 2.583 2.921 3.686
17 0.689 1.333 1.740 2.110 2.567 2.898 3.646
18 0.688 1.330 1.734 2.101 2.552 2.878 3.610
19 0.688 1.328 1.729 2.093 2.539 2.861 3.579
20 0.687 1.325 1.725 2.086 2.528 2.845 3.552
21 0.686 1.323 1.721 2.080 2.518 2.831 3.527
22 0.686 1.321 1.717 2.074 2.508 2.819 3.505
23 0.685 1.319 1.714 2.069 2.500 2.807 3.485
24 0.685 1.318 1.711 2.064 2.492 2.797 3.467
25 0.684 1.316 1.708 2.060 2.485 2.787 3.450
26 0.684 1.315 1.706 2.056 2.479 2.779 3.435
27 0.684 1.314 1.703 2.052 2.473 2.771 3.421
28 0.683 1.313 1.701 2.048 2.467 2.763 3.408
29 0.683 1.311 1.699 2.045 2.462 2.756 3.396
30 0.683 1.310 1.697 2.042 2.457 2.750 3.385
40 0.681 1.303 1.684 2.021 2.423 2.704 3.307
60 0.679 1.296 1.671 2.000 2.390 2.660 3.232
120 0.677 1.289 1.658 1.980 2.358 2.617 3.160
∞ 0.674 1.282 1.645 1.960 2.326 2.576 3.090
Note: The smaller probability shown at the head of each column is the area in one tail; the larger probability
is the area in both tails.
Source: From E. S. Pearson and H. O. Hartley, eds., Biometrika Tables for Statisticians, vol. 1, 3d ed., table 12,
Cambridge University Press, New York, 1966. Reproduced by permission of the editors and trustees of Biometrika.
0 1.725
0.05
t
5
Before your exam answers are collected:
Please ensure thInstructions to students:
x No candidate will be permitted to leave within the first hour or the last half hour of this exam.
x Both entry and exit to the examination hall shall be at the absolute discretion of the invigilator.
x Students should answer 21( TueVtion froP 6eFtion $ and 21( TueVtion froP
6eFtion %
Materials supplied:
x 7aEleV 7aEle ‘ 3erFentaJe 3ointV of t ‘iVtriEution on )inal 3aJe
Materials allowed:
x Calculators:
o You may use Business School approved models only: Casio FX-83GT/Casio-83GT+,
Casio FX-85GT/Casio FX-85GT+, Sharp EL531WH, Aurora AX-582BL.
Using exam answer sheets
x Always use a black pen.
x Complete personal information on all white sheets supplied before the exam begins.
x Write your answer to each question on a SEPARATE white answer sheet, using BOTH sides
if required. For this exam, the required number of white answer sheets is .
x Request yellow continuation sheets to continue an answer if one white sheet is not enough.
x Use the standard character set, printed below, when hand writing in data boxes. E.g. Student
ID, Date of Birth, Question Number. Keep your characters inside the boxes.
x You must return all white answer sheets to the invigilator even if you have not attempted all
questions.
• 6tudentV are entitled to uVe a VinJle $ douEleVided VKeet of SreZritten noteV
3
This page has been left blank for student notes – anything written here will not be marked.
Section A
You must answer one question from this section.
You must use ONE WHITE answer sheet per question. To provide an
answer that exceeds the space on the answer sheet, please raise your
hand to request a YELLOW answer sheet.
1. Consider the simple regression with a constant
Yi = ↵ + Xi + ui, i = 1, . . . , n. (1)
1.1. Verify the following numerical properties for the OLS estimator:
(i)
Xn
i=1
uˆi = 0, (ii)
Xn
i=1
uˆiYˆi = 0, (iii)
Xn
i=1
Yˆi = Xn
i=1
Yi
where ˆui = Yi Yˆi, Yˆi = ˆ↵ + ˆXi, and ˆ↵ and ˆ denote the OLS
estimators of ↵ and , respectively. [20%] 1.2. Set = 0 in model (1), that is, consider the model
Yi = ↵ + ui, i = 1, . . . , n. (2)
Assume that ui ⇠ i.i.d.(0, 2), that is, the errors ui are independent
and identically distributed across i, with mean zero and variance 2.
Show that the OLS estimator of ↵, ˆ↵, is equal to Y¯ = n1 Pn
i=1 Yi
and the variance of ˆ↵ is 2/n. [20%] 1.3. Verify which of the numerical properties described in sub-question
1.1. hold for the OLS estimator of model (2). [10%] 2. Let F (FEMALE) be a variable which takes the value “0” for male and
“1” for female. Similarly, the variable M (MALE) takes on the value “1”
for male and “0” for female. Y denotes the Earnings.
For a given parameter ✓, let ˆ✓ denote its OLS estimator.
2.1. Derive the OLS estimators of ↵F and ↵M for the regression model
Yi = ↵F Fi + ↵MMi + ui, i = 1,…,n (3)
Show that ˆ↵F = Y¯F , the average of the Yi’s only for females, and
↵ˆM = Y¯M, the average of the Yi’s only for males. [20%] Continued overleaf
2.2. Consider the regression
Yi = ↵ + Fi + ui, i = 1, . . . , n. (4)
Substitute M = 1 F in (3) and show that ↵ = ↵M and =
↵F ↵M. [10%] 2.3. Derive the OLS estimators of ↵ and for model (4). Show that
↵ˆ = ˆ↵M and ˆ = ˆ↵F ↵ˆM, where ˆ↵F and ˆ↵M have been derived in
sub-question 2.1. [20%] Section B
You must answer one question from this section.
You must use ONE WHITE answer sheet per question. To provide an
answer that exceeds the space on the answer sheet, please raise your
hand to request a YELLOW answer sheet.
3. Consider the following wage-determination equation for the British economy for the period 1950-1969:
W
ct = 8.582 + 0.364 P Ft + 0.004 P Ft1 2.560 Ut
(1.129) (0.080) (0.072) (0.658)
(5)
where
W= wages and salaries per employee.
PF= prices of final output at factor cost.
U= unemployment in Great Britain as a percentage of the total number
of employees in Great Britain.
t= time, measured in years.
The figures in parenthesis are standard errors. The R2 of the regression
is 0.873.
3.1. Interpret briefly the preceding equation. [12.5%] 3.2. What is the rationale for the introduction of P Ft1?. [12.5%] Continued overleaf
3.3. Should the variable P Ft1 be dropped from the model? Explain
your answer [12.5%] 3.4. Suppose that you are asked to estimate the elasticity of wages and
salaries per employee with respect to the price of final output. How
would you modify the regression model (5) to accomplish your task?
[12.5%] 4. Consider the Cobb-Douglas production function
Y = 1L2K3 (6)
where Y= output, L = labour input, and K = capital input.
Dividing equation (6) through by K, we get
(Y/K) = 1 (L/K)
2 K2+31 (7)
Taking the natural log of (7) and adding the error term, we obtain
ln (Y/K) = 0 + 2 ln (L/K)+(2 + 3 1)ln (K) + u (8)
where 0 = ln(1).
4.1. Suppose you had data to run the regression (8). How would you
test the hypothesis that there are constant returns to scale, that is,
(2 + 3) = 1? [17%] 4.2. If there are constant returns to scale, how would you interpret regression (8)? [16%] 4.3. Suppose we divide (6) by L rather than by K. Assuming constant
returns to scale, how would you interpret this regression? [17%] END OF QUESTION PAPER
APPENDIX D: STATISTICAL TABLES 961
TABLE D.2 PERCENTAGE POINTS OF THE t DISTRIBUTION
Example
Pr (t > 2.086) = 0.025
Pr (t > 1.725) = 0.05 for df = 20
Pr (|t| > 1.725) = 0.10
Pr 0.25 0.10 0.05 0.025 0.01 0.005 0.001
df 0.50 0.20 0.10 0.05 0.02 0.010 0.002
1 1.000 3.078 6.314 12.706 31.821 63.657 318.31
2 0.816 1.886 2.920 4.303 6.965 9.925 22.327
3 0.765 1.638 2.353 3.182 4.541 5.841 10.214
4 0.741 1.533 2.132 2.776 3.747 4.604 7.173
5 0.727 1.476 2.015 2.571 3.365 4.032 5.893
6 0.718 1.440 1.943 2.447 3.143 3.707 5.208
7 0.711 1.415 1.895 2.365 2.998 3.499 4.785
8 0.706 1.397 1.860 2.306 2.896 3.355 4.501
9 0.703 1.383 1.833 2.262 2.821 3.250 4.297
10 0.700 1.372 1.812 2.228 2.764 3.169 4.144
11 0.697 1.363 1.796 2.201 2.718 3.106 4.025
12 0.695 1.356 1.782 2.179 2.681 3.055 3.930
13 0.694 1.350 1.771 2.160 2.650 3.012 3.852
14 0.692 1.345 1.761 2.145 2.624 2.977 3.787
15 0.691 1.341 1.753 2.131 2.602 2.947 3.733
16 0.690 1.337 1.746 2.120 2.583 2.921 3.686
17 0.689 1.333 1.740 2.110 2.567 2.898 3.646
18 0.688 1.330 1.734 2.101 2.552 2.878 3.610
19 0.688 1.328 1.729 2.093 2.539 2.861 3.579
20 0.687 1.325 1.725 2.086 2.528 2.845 3.552
21 0.686 1.323 1.721 2.080 2.518 2.831 3.527
22 0.686 1.321 1.717 2.074 2.508 2.819 3.505
23 0.685 1.319 1.714 2.069 2.500 2.807 3.485
24 0.685 1.318 1.711 2.064 2.492 2.797 3.467
25 0.684 1.316 1.708 2.060 2.485 2.787 3.450
26 0.684 1.315 1.706 2.056 2.479 2.779 3.435
27 0.684 1.314 1.703 2.052 2.473 2.771 3.421
28 0.683 1.313 1.701 2.048 2.467 2.763 3.408
29 0.683 1.311 1.699 2.045 2.462 2.756 3.396
30 0.683 1.310 1.697 2.042 2.457 2.750 3.385
40 0.681 1.303 1.684 2.021 2.423 2.704 3.307
60 0.679 1.296 1.671 2.000 2.390 2.660 3.232
120 0.677 1.289 1.658 1.980 2.358 2.617 3.160
∞ 0.674 1.282 1.645 1.960 2.326 2.576 3.090
Note: The smaller probability shown at the head of each column is the area in one tail; the larger probability
is the area in both tails.
Source: From E. S. Pearson and H. O. Hartley, eds., Biometrika Tables for Statisticians, vol. 1, 3d ed., table 12,
Cambridge University Press, New York, 1966. Reproduced by permission of the editors and trustees of Biometrika.
0 1.725
0.05
t
5
Before your exam answers are collected:
Please ensure that you have written the course code (on the front of this exam paper), your
student ID, date of birth and the number of the question that you have attempted on each
answer sheet.
Put your exam answers in the order of the question number, ensuring that yellow answer
sheets follow the appropriate white answer sheet.
Do not place any other exam materials, including the exam paper, beside the A3 answer at you have written the course code (on the front of this exam paper), your
student ID, date of birth and the number of the question that you have attempted on each
answer sheet.
Put your exam answers in the order of the question number, ensuring that yellow answer
sheets follow the appropriate white answer sheet.
Do not place any other exam materials, including the exam paper, beside the A3 answer