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Introduction to Econometrics - Prof. Brendan Kline - UT Austin
Homework #5
Problems
1.
Consider an equation to explain salaries of CEOs in terms of annual firm sales,
return on equity (
roe
, in percentage form), and return on the firm’s stock (
ros
,
in percentage form):
log(
salary
) =
β
0
+
β
1
log(
sales
) +
β
2
roe
+
β
3
ros
+
u
(i) In terms of the model parameters, state the null hypothesis that, after
controlling for
sales
and
roe
,
ros
has no effect on CEO salary. Also, state the
alternative that
ros
does affect a CEO’s salary.
(ii) Using the data in CEOSAL1.DTA, the following equation was obtained by
OLS:
\
log(
salary
) = 4
.
32 +
.
280 log(
sales
) +
.
0174
roe
+
.
00024
ros
(
.
32)
(
.
035)
(
.
0041)
(
.
00054)
n
= 209
, R
2
=
.
283
By what percentage is salary predicted to increase if
ros
increases by 50? Does
ros
have a practically large effect on salary?
(iii) Test the null hypothesis that
ros
has no effect on salary against the alter-
native that
ros
does have an effect. Carry out the test at the 10% significance
level.
(iv) Would you include
ros
in a final model explaining CEO compensation in
terms of firm performance? Explain.
(v) Compute a 95% confidence interval for the coefficient on
roe
.
(vi) Compute a 95% confidence interval for the coefficient on
ros
.
Hint:
as discussed for example in example 4.1 in the book, the numbers in
parentheses underneath the “estimated equation” in part (ii) are the associated
standard errors. This is true basically everywhere in the book.
(This question is based on Wooldridge Chapter 4, Problem 2.)
2.
The variable
rdintens
is expenditures on research and development (R&D) as
a percentage of sales. Sales are measured in millions of dollars. The variable
Introduction to Econometrics - Prof. Brendan Kline - UT Austin
profmarg
is profits as a percentage of sales. Using the data in RDCHEM.DTA
for 32 firms in the chemical industry, the following equation is estimated:
\
rdintens
=
.
472 +
.
321 log(
sales
) +
.
050
profmarg
(1
.
369)
(
.
216)
(
.
046)
n
= 32
, R
2
=
.
099
(i) Interpret the coefficient on log(
sales
).
In particular, if sales increases by
10%, what is the estimated percentage point change in
rdintens
?
Is this an
economically large effect? (Remember that
rdintens
is already measured in per-
centage points, so the “units” of the
y
variable are already percentage points.)
(ii) Test the hypothesis that R&D intensity does not change with sales against
the alternative that it does change with sales. Do the test at the 10% and the
20% levels.
(iii) Interpret the coefficient on
profmarg
. Is it economically large?
(iv) Does
profmarg
have a statistically significant effect on
rdintens
? (Since
this question does not directly specify a significance level, think about both
α
= 0
.
05 and
α
= 0
.
10.)
(v) Compute a 95% confidence interval for the coefficient on
log
(
sales
).
(vi) Compute a 95% confidence interval for the coefficient on
profmarg
.
(This question is based on Wooldridge Chapter 4, Problem 3.)
Computer exercises
(
Important note:
submit your written answers, and also
in
di
cate
in
your
an
swer
the
Stata
com
mand(s)
you
used.)
3.
The following model can be used to study whether campaign expenditures affect
election outcomes:
voteA
=
β
0
+
β
1
log(
expendA
) +
β
2
log(
expendB
) +
β
3
prtystrA
+
u,
where
voteA
is the percentage of the vote received by candidate A,
expendA
and
expendB
are campaign expenditures by Candidates A and B, and
prtystrA
is
a measure of party strength for Candidate A (the percentage of the most recent
presidential vote that went to A’s party).
(i) What is the interpretation of
β
1
? (Note that
voteA
is already measured in
percentage points, so this is a level-log model where the units of measurement
of
y
are percentage points.)
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Related Questions
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English (en)
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Question 7
You are the manager of a firm and you are required to optimize the Cobb-Douglas function given the
Not yet
following parameters. The maximum amount of money available to spend is $340 where the price of K = 8
and the price of L = 4. That is P = 8 and P = 4. The function is given as q = K.4 L0.6
answered
Marked out of 4
Ronique Browne
What are the optimal values K, and Lo?
P Flag question
O a. K, 72, Lo = 18
O b. None of the above
O. Ko z 68, Lo z 34
O d. Ko 34, Lo 68
Donalie Dailey
Question 8
What is the price elasticity of demand given P = 12 and Q = 1300 – p².
Not yet
answered
Select one:
Marked out of 2
O a. -0.104
P Flag question
O b. -0.21
OC -1.7
w Combined Assessment - Micro.
O d. 0.104
You
8:41 PM| fki-aqbf-siv
CC
8:41 PM
P Type here to search
WE
26°C A O O
G ENG
12/10/2021
立
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TO: Distribution
FR: Lawrence H. Summers
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Atlas Movie Theater Ticketing
Ticket Class
Classic
Silver
Gold
Current Rate
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13.25
17.5
Total Capacity 300
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Average
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9. Exercise 3.9
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Table 1
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2006
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Average / 1
(2005)
5,000
(Dollars)
1.00
1.25
(Dollars)
1.00
Table 2
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2.50
(Dollars)
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Consider the model of a firm that produces final goods using R&D and components as inputs, with cost dataas follows:Assembly: Total cost of production = PAQA = 400Earnings of High-Skilled Labor = WHHA = 100Earnings of Low-Skilled Labor = WLLA = 200Earnings of Capital = RKA = 100R&D: Total cost of production = PRQR = 400Earnings of High-Skilled Labor = WHHR = 175Earnings of Low-Skilled Labor = WLLR = 125Earnings of Capital = RKR = 100A) Which factor is assembly intensive? In which factor(s) is R&D intensive?B) Suppose that due to the opening of trade, the price of assembly falls by ∆PA/PA = −20%, the price of R&D remains unchanged, ∆PR/PR = 0%, and capital’s share earnings remains constant.C) What has happened to the relative wage of high-skilled/low-skilled labor? Does this match the predictions of the offshoring model?
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- Define managerial economics and its relation with economics theory and decision science?arrow_forwardYou are attending the annual stockholders’ meeting of PIC Company. A fellow shareholder points out that the manager of PIC earned $100,000 last year, while the manager of a rival firm, CUP Enterprises, earned only $50,000. A motion is made to lower the salary of PIC’s manager. Given only this information, what should you do?arrow_forwardWhat are the assumptions of Arbitrage Pricing Theory (APT) modelarrow_forward
- Q5. Graphically illustrate the impact of the management’s restructuring decision on the firm’s production function. Your diagram should have the amount of human intelligence on the horizontal axis and the number of decisions on whether to provide insurance on the vertical axis. Fully label your diagram. Note that there are no actual numbers given in this question: you may make them up or simply use appropriate notations. Briefly explain the key information of your diagramarrow_forwardRoyal Dutch Shell has been doing business in Nigeria since the 1920s, and has announced new plans to develop oil and gas projects there. However, over the years Shell has confronted a series of episodes involving country risk. Shell’s operations are centred in Nigeria’s Ogoni region, where the local citizens have protested Shell’s drilling and refining activities, which are said to spoil the natural environment and reduce the amount of available farmland. Protestors also accuse Shell of extracting wealth from the region without adequately compensating local residents. Ogonis sabotaged Shell’s operations to such an extent that the firm suspended parts of its Nigerian operations. Shell also came under pressure to divest its Nigerian operations and to pay reparations to the locals. What proactive steps can Shell take to anticipate future country risk? What should Shell do to deal more effectively with country risk?arrow_forwardLarry Summers has worn many hats over the years, one of which was Chief Economist of the World Bank from 1991-1993. While he was holding that position, a memo from his office was leaked to the press and it caused a bit of a scandal. Using your understanding of neoclassical economic analysis, explain the logic behind Summers's proposal below. Then, once you have explained what's going on here, give your opinion. Do you agree or disagree? Why? DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEP 'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons: 1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country…arrow_forward
- Q. Gamma Corporation, one of the firms that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to a quite attractive level. You collect the following product information in order to convince the CEO at Gamma Corporation that Beta is indeed operating inefficiently: MPL = 10 PL =$20 MPK = 15 PK =$15 Explain how these data provide evidence of inefficiency. How could the new manager of Beta Corporation improve efficiency? Thank you!arrow_forwardAn automobile manufacturer wants to understand the factors influencing car sales. The company gathers data on variables such as price, advertising expenditure, and consumer income. Econometric models are used to analyze how these variables affect car sales, aiding in strategic decision-making. In this context, econometrics is used for:A) Product designB) Understanding sales determinantsC) Assessing employee performanceD) Planning corporate events Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forwardQUESTION 14 Use the table below to create a nonlinear model based on the table to answer the following question(s). The Atlas Movies Theater is planning to reprice their ticket rates to maximize revenues. They have three classes of tickets: Classic, Silver, and Gold. The table below provides information on the average ticket sales, revenue and price elasticity on demand. They have a total seating capacity of 300. The table also provides the price range within which they plan to reduce their ticket rates. Atlas Movie Theater Ticketing Ticket Class Classic Silver Gold Current Rate 8.45 13.25 17.5 Total Capacity 300 $12.50 O $12.17 Average Daily Sold 150 80 30 Elasticity Price Range 6.5 11.5 15.5 -1.3 -2.25 -1.1 7.5 12.5 16.5 According to the nonlinear model, what is the new price for Silver tickets? O $12.06 $7.40arrow_forward
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