Exercise 1:
You are using an econometric model to study the dependence of the annual salaries of
CEOs (Chief Executive Officers) of major private companies on some variables. The
sample data consist of observations for 60 private firms which include the following
variables:
𝑆𝐴𝐿𝑖 : the annual salary of the CEO of firm 𝑖th, measured in thousands of dollars;
𝐴𝑅𝑖 : the annual total sales revenues of firm 𝑖th, measured in millions of dollars;
𝑀𝑉𝑖 : the market value of firm 𝑖th, measured in millions of dollars;
𝐸𝑀𝑖 : the number of years the CEO has been employed with firm 𝑖th;
𝐴𝐺𝐸𝑖 : the age of the CEO of firm 𝑖th, in years.
The regression model you propose is:
𝑙𝑛𝑆𝐴𝐿𝑖 = 𝛽0 + 𝛽1 𝑙𝑛𝐴𝑅𝑖 + 𝛽2 𝑙𝑛𝑀𝑉𝑖 + 𝛽3 𝐸𝑀𝑖 + 𝛽4 𝐸𝑀𝑖2 + 𝛽5 𝐴𝐺𝐸𝑖 + 𝛽6 𝐴𝐺𝐸𝑖2 + 𝑢𝑖
in which (𝑙𝑛𝑋𝑖 ) denotes the natural logarithm of 𝑋𝑖 . 𝐸𝑀2 and 𝐴𝐺𝐸 2 are the squares of
corresponding variables, 𝑢𝑖 is stochastic disturbance.
Using the data, you estimate the following regression models (estimated standard errors
in parentheses below the coefficient estimates):
̂ 𝑖 = 5.572 + 𝟎. 𝟏𝟖𝟐𝑙𝑛𝐴𝑅𝑖 + 0.102𝑙𝑛𝑀𝑉𝑖 + 0.046𝐸𝑀𝑖 − 0.00122𝛽4 𝐸𝑀𝑖2 − 0.042𝐴𝐺𝐸𝑖 +
(1) 𝑙𝑛𝑆𝐴𝐿
0.00033𝐴𝐺𝐸𝑖2
𝑠𝑒 (0.0412) (0.0493) (0.0142) (0.000476) (0.0412) (0.00036)
𝑆𝑆𝑅 = 42.060; 𝑆𝑆𝑇 = 64.646
̂ 𝑖 = 4.369 + 0.1646𝑙𝑛𝐴𝑅𝑖 + 0.1085𝑙𝑛𝑀𝑉𝑖 + 0.04512𝐸𝑀𝑖 − 0.00121𝛽4 𝐸𝑀𝑖2
(2) 𝑙𝑛𝑆𝐴𝐿
𝑆𝑆𝑅 = 42.474; 𝑆𝑆𝑇 = 64.646
1. ̂1
In the model (1) above, interpret the meaning of each estimated coefficients 𝛽
̂2 .
and 𝛽
Does each independent variable AR or MV affect the salaries of CEOs?
2. In the model (1), by how much the model can explain for the variation of salaries
of CEOs?
Is it correct to say that all independent variables of the model (1) simultaneously do not
explain for the variation of the salaries of CEOs?
3. In the model (1), test the hypothesis that coefficients of AR and MV are equal
̂1 , 𝛽
given that: 𝑐𝑜𝑣(𝛽 ̂2 ) = −0.001473
State the coefficient restrictions that are imposed on regression equation (1) in estimating
model (2) above? Conduct a test of these coefficient restrictions and state the meaning
of this test? Based on the outcome of the test, would you choose equation (2) or equation
(1)?
4. What are the implications of introducing the squared terms of EM and AGE in the
model (1)? Present the procedure to use F-test to test the hypothesis that we can drop out
two squared terms EM2 and AGE2 from model (1) (use the form of population regression
model).
Việc thêm biến bình phương vào mô hình sẽ chuyển dạng đồ thị của mô hình từ dạng
tuyến tính sang dạng parabol.
Để kiểm tra xem có cần thiết thêm các biến bình phương vào mô hình không thì ta dùng
kiểm định F
𝑙𝑛𝑆𝐴𝐿𝑖 = 𝛽0 + 𝛽1 𝑙𝑛𝐴𝑅𝑖 + 𝛽2 𝑙𝑛𝑀𝑉𝑖 + 𝛽3 𝐸𝑀𝑖 + 𝛽4 𝐴𝐺𝐸𝑖 + +𝑢𝑖
Exercise 2:
In order to explain the US defense budget, you are using the data from 1962 to 1981 with
the following variables (all measured in billions USD) and estimate the corresponding
model (Model 1):(Use α=0.05 for references)
𝑌𝑡 : Defense budget outlay for year t
𝑋2𝑡 : GNP for year t
𝑋3𝑡 : US military sales in year t
𝑋4𝑡 : Aerospace industry sales in year t
Dependent Variable: Y Sample: 1962 1981
Method: Least Squares Included observations: 20
Variable Coefficient Std. Error t-Statistic Prob.
Constant 21.40251 1.496947 14.29744 0.0000
X2 0.013879 0.003207 4.328062 0.0008
X3 0.073146 0.203805 0.358902 0.7254
X4 1.389753 0.130197 10.67423 0.0000
R-squared 0.996366 Mean dependent var 83.86000
Adjusted R-squared 0.994688 S.D. dependent var 28.97771
S.E. of regression 2.111972 Akaike info criterion 4.602338
Sum squared resid 57.98554 Schwarz criterion 4.950845
Log likelihood -39.02338 F-statistic 593.9815
Durbin-Watson stat 2.233771 Prob(F-statistic) 0.000000
1. Explain the meaning of each estimated coefficient and 𝑅2 in the above model.
2. Test for significance of each independent variable and
3. When GNP increases by 1 bil USD (other variables unchanged), what is the
confidence interval of the changing levels of defense budget?
4. Do you think that the military budget does not depend on the number of troops
involving in the conflict given that if you regress 𝑌 on 𝑋2, 𝑋3, 𝑋4 and 𝑋5 (the
number of troops) (with intercept), you get new 𝑅2 = 0.9995. Conduct the
appropriate test and comment.
5. test for overall significance of the model.
