Hypothesis Testing - Introduction to Econometrics - Homework 1 | EC 421, Assignments of Introduction to Econometrics

Download Hypothesis Testing - Introduction to Econometrics - Homework 1 | EC 421 and more Assignments Introduction to Econometrics in PDF only on Docsity! 1 Economics 421/521 Winter 2006 Homework #1 Part I. Hypothesis Testing 1. Suppose that you estimate a model of house prices to determine the impact of having beach frontage on the value of a house. After researching the problem, you decide to use the size of the lot instead of the size of the house as your explanatory variable for a number of theoretical and data availability reasons. The results (standard errors in parentheses) are: PRICEi = 40 + 35.0 LOTi – 2.0 AGEi + 10.0 BEDi – 4.0 FIREi + 100 BEACHi (29) (5.0) (1.1) (10.0) (3.0) (9.0) where n = 30, R2 = .63, and PRICEi = the price of the ith house (in thousands of dollars), LOTi = the size of the lot of the ith house (in thousands of square feet), AGEi = the age of the ith house in years, BEDi = the number of bedrooms in the ith house, FIREi = a dummy variable for a fireplace (1 = yes for the ith house), and BEACHi = a dummy for having beach frontage (1 = yes for the ith house). a) You expect the variables LOT, BED, and BEACH to have positive coefficients. Test this hypothesis at the 5 percent level. b) You expect AGE to have a negative coefficient. Test this hypothesis at the 10 percent level. c) At first you expect FIRE to have a positive coefficient, but one of your friends says that fireplaces are messy and are a pain to keep clean, so you are not sure. Run a two- sided t-test around zero to test the two-sided hypothesis at the 5 percent level. d) What problems appear to exist in your equation? (Hint: Do you have any unexpected signs? Do you have any coefficients that are not significantly different from zero?) e) Which of the problems that you outline in part d above is the most worrisome? Explain.