Wolkite University

College of Business and Economics

Postgraduate Studies
Department of Management (Major in MBA)
Home Take Exam/ Work Sheet/Assignments

Instructions:
 It is an individual assignment I
 This assignment is aimed at equip you with the concept of Econometrics and
prepare you for all assessments.
 Copying from each other results ZERO mark.
 Submission date: On the Date of Final exam
 Try all questions accordingly
 Total Mark: 20%-25%.
Part I: Attempt all of the following questions
1. Econometrics is considered as an integration of economic theory, mathematical
economics and statistics but entirely different form each one of them. Explain.
2. Define the concept of regression.
3. Differentiate between PRF and SRF.
4. Differentiate between exact and inexact relationship and explain the reason for
incorporating the disturbance term in econometric modeling.
5. What do we mean by conditional expectation, e.g. E(Y/ Xi)?
6. Briefly explain the method of ordinary least squares.
7. State and explain the assumptions underlying the method of (ordinary) least squares;
their consequences, effects and solutions.
8. The following represents the true relationship between the independent variables
X1, X2, X3, and the dependent variable Y

Yi= bo+b1X1i+b2X2i+b3X3i+Ui

where Y=Quantity demanded

X1=price of the commodity.
X2=price of the other commodities
X3=Income of the consumer
Ui=disturbance term

Prepared by: Tesfaye Etensa (Ass. prof.) ; tesfayeetensa@gmail.com

 A. Is the above relation exact? Why?
B. What is the economic meaning of the coefficients?
C. What will be the expected sign of the coefficients?
D. What will be the expected size (magnitude) of the coefficients?

Part II: Sophisticated Problems

1. There are occasions when the two variable linear regression model assumes the
following form:
Yi = βX i + ε i ; where β is the parameter and ε i is the disturbance term. In this model

the intercept term is zero. The model is therefore known as regression through the origin.
For this model show that:

A. The least squares estimator; βˆ =

X Y i i
2
X i

B. σu
2
where σ is estimated by σ e i2 ,

var ( βˆ ) =
2
u
2
u =
 X i
2
n −1
ei represents the residuals.
2. The following data is based on the consumption expenditure and incomes for 15
households at a particular month.
ΣX=1922 ΣY=1823 ΣXY=1,838,678
ΣX2=2,541,333 ΣY2=1,789,940

A. Obtain marginal propensity to consume and level of autonomous

consumption.
B. Construct a 95% confidence interval for the coefficients.
C. Test the significance of the coefficients at 5% level.
D. Comment on goodness of fit.
3. The quantity demanded of commodity is assumed to be a linear function of its price X.
the following results has been obtained from a sample of 10 observations.

Price in Birr (X) 15 13 12 12 9 7 7 4 6 3

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 Quantity in kg 760 775 780 785 790 795 800 810 830 840

Making use of the above information

A. Estimate the linear relationship and interpret the results
B. Estimate the standard errors of the regression coefficients
C. What percent of the variation in quantity demanded is explained by the regression
line?
D. Compute the price elasticity of demand at X=12 and Y=780
E. What is the average price elasticity of demand?
F. Forecast the demand at a price level of 10 birr and set a 95% confidence limit for
the forecasted value
G. Test the significance of the regression coefficients.
H. Conduct tests of significance for r and R2
I. Present the result of your analysis

4. The following table shows the levels of output (Y), labour in put (X1) and capital input
(X2) of 12 firms measured in arbitrary units.
ΣX2=110 Σ X12 =980 ΣYX1=40,834
ΣX1=647 ΣX22=34,843 ΣYX2=6,7100
ΣY=757 ΣY2=48,143 ΣX1X2=5,783
A. Estimate the output function Y=bo+b1X1+b2X2+U
B. What is the economic meaning of the coefficients
C. Compute the standard errors of the coefficients
D. Run tests of significance of the coefficients
E. Compute the coefficient of multiple determination and interpret it
F. Conduct the overall significance test and interpret your result
5. The following table includes GDP (X) and the demand for food (Y) for a certain
country over ten year period.

Year 1980 81 82 83 84 85 86 87 88 89

Y 6 7 8 10 8 9 10 9 11 10

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 X 50 52 55 59 57 58 62 65 68 70

A. Estimate the food function Y = β0+ β1X+ u and interpret your result.

B. Calculate elasticity of Y with respect to X at their mean value and interpret your result.

C. Compute r2 and find the explained and unexplained variation in the food expenditure.

D. Compute the standard error of the regression estimates and conduct tests of significance at
the 5% significant level.

E. Find the 95% confidence interval for the population parameter (β0 and β1)
6. The following table shows observations on quantity of oranges sold (Y), price in cents
(X1), and advertising expenditures (X2)
Quantity Price Advertising expenditure
(Y) (X1) (X2)
55 100 5.5
70 90 6.3
90 80 7.2
100 70 7.0
90 70 6.3
105 70 7.35
80 70 5.6
110 65 7.15
125 60 7.50
115 60 6.90
130 55 7.15
130 50 6.50

A. Find the least squares estimates of the regression coefficients

B. What is the economic meaning of the coefficients
C. Calculate the value of R2
D. Find the standard errors of the estimated parameters
E. Construct 95 percent confidence intervals for the population parameters

7. The following results were obtained from a sample of 12 firms on their output (Y), labor
input (X1) and capital input (X2), measured in arbitrary units. (Use both Crammer’s rule
and Matrix Approach)
Y = 753 Y2 = 48,139 YX1 = 40, 830
X1 = 643 X12 = 34,843 YX2 = 6,796

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 X2 = 106 X22 = 976 X1X2 = 5,779
A. Find the least squares equation of Y on X1 and X2. What is the economic meaning of
your coefficients?
8. Given the following sample values of output (Y), compute the standard errors of the
estimates and test their statistical significance.

Firms A B C D E F G H I J K L
Output 64 71 53 67 55 58 77 57 56 51 76 68

A. Find the multiple correlation coefficient and the unexplained variation in output
B. Construct 99 percent confidence intervals for the population parameters.

9. From the following data estimate the partial regression coefficients, their standard
errors, and the adjusted and unadjusted R2 values.

Y =367.693 X 2 = 402.760 X 3 = 8.0

−
(Yi - Y )2 = 66042.269 (X2i- X 2 )2 = 84855.096
− −
(X3i- X 3 )2 =280.000 (Yi - Y ) (X2i- X 2 ) =74778.346
− − −
(Yi - Y ) (X3i- X 3 ) = 4250.900 (X2i- X 2 )(X3i- X 3 ) = 4796.000

n =15
10. A sample of 20 observations corresponding to the regression model.
Yi = α + βX i + ε i ; Where ε i is normal with zero mean and unknown variance σ u 2 ,
gave the following data:
ΣYi = 21.9 Σ(Yi- Y )2 = 86.9
Σ(Xi- X )(Yi- Y ) =106.4 ΣXi=186.2 Σ(Xi- X )2 =215.4
A. Estimate α and β and calculate the standard errors of your estimate.
B. Test the hypothesis that Y and X are positively related.
C. Estimate the value of Y corresponding to a value X fixed at X=10 and find its 95%
confidence interval.
11. Economic theory suggests that consumption expenditure is influenced by the level of
disposable income. An econometrician has gathered the following information Xi, the

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 disposable income and Yi, the consumption expenditure from a sample of 20
observations to investigate the nature of the relationship.
ΣXi2 = 3500 ΣYi2 = 4500
X =7 Y =9 r = 0.7

A. Fit a linear regression of consumption on income and interpret the result.

B. Compute the marginal propensity to save and estimate the consumption
function.
C. Is the estimated consumption function plausible on the basis of a priori
theory and statistical criteria?
D. What is the expected sign of the intercept coefficient of the consumption
function?
E. Estimate the consumption expenditure at the income level of 1000 birr and
estimate the variance of the estimator.
F. Test the significance of R2.
12. Given a true relationship between X and Y
Yi = β 0 + β 1 X i + U i

A. Show Cov ( β 0 , β 1 ) = − X σ u2 , under basic assumptions of the linear regression

2

x i

model.
B. Show that the estimated regression line passes through the mean values of X and Y.
C. Assume that the above relationship is reduced into Yi = bo + Ui assuming the basic
assumptions of the linear regression model obtain the unbiased estimators of the mean
and variance of b0.
13. The following results have been obtained form a sample of 13 observations on quantity
demanded Y of a particular commodity and its corresponding price X
Y(Kg) 780 785 790 795 810 810 820 821 830 835 840 849 870
X(birr) 20 18 16 14 13 12 11 11 10 9 8 7 5

A. Estimate the linear demand function for the commodity and interpret your result.
B. Compute the standard error of regression line and the coefficients
C. Compute the price elasticity of demand at mean values.

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D. What is the part of variation in demand for the commodity that remains unexplained
by the regression line?
E. What is the explained proportion? What does it show?
F. Forecast the quantity demand at price level of 13 Birr. Compare your result with the
value in the data.
14. There is a two-way causation in correlation analysis where as there is a one-way
Causation in regression analysis. Explain.
15. Assume that X and Y are perfectly and linearly related in such as manner that all the
points in the scatter diagram would lie exactly on a regression line given by Y= b0 +
b1X . Show that the correlation coefficient (r) is either 1 or –1.
16. Assume that the quantity supplied of a commodity Y is a linear function of its price
(X1) and wage rate of labor used (X2) in the production of the commodity. The sample
values are summarized as follows:
ΣY=1,282 ΣY2=132,670 ΣX1Y=53,666 n=19
ΣX1=545 ΣX21=22,922 ΣX2Y=5,707
ΣX2 =86 ΣX22=617 ΣX1X2=2,568
A. Using OLS estimate the parameters of the model
B. Estimate the elasticities and interpret your results
C. Forecast the supply for a particular commodity at X1=32 and X2=10, set a 95%
confidence interval for the forecasted value
D. Test the overall significance of the supply function

17. What are some of the problems in using R2 as a measure of goodness of fit? Compare
and contrast R2 and the corrected R2 on the basis of sample size and parameters to be
estimated from a particular model.
18. Assume that X and Y are perfectly and linearly related in such as manner that all the
points in the scatter diagram would lie exactly on a regression line given by Y= b0 +
b1X. Show that the correlation coefficient (r) is either 1 or –1.
19. The demand function for coffee is estimated as follows

Ŷt = 2.69 – 0.4795 Xt r2 = 0.6628

(0.1216) (0.1140)

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where Yt = cups per person per day Xt = average retail price of coffee
Find the price elasticity of demand.
Good luck @being committed!!!!