Econ 314: Quantitative Economics: Tutorial 8 Multicollinearity
Please print and attempt prior to the tutorial session
1. What is the difference between perfect and imperfect Multicollinearity?
2. Consider the model:
Y i =B 1 + B2 X i + B3 X 2i + B4 X 3i + ui
Where: Y = the total cost of production
X = output
2 3
Since X and X are functions of X, there is perfect collinearity. Do you agree or disagree?
Explain.
3. In a study of the production function of the United Kingdom bricks, pottery, glass, and cement
industry for the period 1961 to 1981, Leighton Thomas obtained the following results
where Q = the index of production at constant factor cost
K = the gross capital stock at 1975 replacement cost
H =hours worked
t = time trend, a proxy for technology.
Figures in parenthesis are the estimated standard errors.
a. Interpret both regressions
b. You are told that in model 2, the coefficient of t and log K are individually insignificant at the 5%
level. What might account for the insignificance of log K?
c. If you were told that the correlation coefficient between t and log K is 0.980, what conclusion would
you draw?
d. Even if t and log K are individually insignificant in Model 2, would you accept or reject the
hypothesis that in Model 2 all partial slope coefficients are simultaneously equal to zero? Which
test would you use?
e. In Model 1, what are the returns to scale?
4. A student has estimated the determinants of house prices in the South Africa, using a survey
conducted in 2005. The variables used are:
- the price of the house measured in thousands of rands - price;
- the assessment value of the house in thousands of rands - assess;
- the size of the land in square metres - lndsize;
- the size of the house in square metres - hossize.
The output is given below:
Source | SS df MS Number of = 88
obs
------------- F( 3, 84) = 129.97
+------------------------------
Model | 755162.538 3 251720.846 Prob > F = 0.0000
Residual | 162691.968 84 1936.80914 R-squared = 0.9227
------------- Adj R- = 0.9164
+------------------------------ squared
Total | 917854.506 87 10550.0518 Root MSE = 44.009
-----------------------------------------------------------------------------
price | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------
assess | .9155515 .1052728 8.70 0.000 .706205 1.124898
lndsize | .0425625 .0468901 0.91 0.371 -.0528361 .1379612
hossize | -.1677938 .6554645 -0.26 0.799 -1.472723 1.137136
_cons | -15.85658 17.33887 -0.91 0.363 -50.33683 18.62367
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a. Looking at the output results, do you suspect multicollinearity? Explain fully.
