Economics 421/521

Winter 2008

Homework #2

The assignment will be handed out in lab this week (1/16), and will be due in lab next week (1/23).

1. Assume that you’ve been hired by the surgeon general of the United States to study the determinants of smoking behavior and that you estimate the following cross-sectional model based on data for 1988 from all 50 states (standard errors in parentheses):

` Ĉ`_{i} = 100 – 9.0E_{i} + 1.0I_{i} - 0.04T_{i} – 3.0V_{i} + 1.5R_{i }(36.) (3.5) (.75) (0.05) (.90) (0.3)

` R`^{2} = .57 n = 50 (states)

where C_{i} = the number of cigarettes consumed per day per person in
the i^{th} state, E_{i} = the average years of education for
persons over 21 in the i^{th} state, I_{i} = the average income
in the i^{th} state (thousands of dollars), T_{i} = the tax per
package of cigarettes in the i^{th} state (cents), V_{i} = the
number of video ads against smoking aired on the three major networks in the i^{th}
state, and R_{i} = the number of radio ads against smoking aired on the
five largest radio networks in the i^{th} state. (a) Develop and test
(at the 5% level) appropriate hypotheses for the coefficients of the variables
in this equation. (b) Do you appear to have any irrelevant variables? Do you
appear to have any omitted variables? Explain. (c) Assume your answer to part
(b) was yes to both. Which problem is generally more troublesome, irrelevant
variables or omitted variables? Why? (d) One of the purposes of estimating this
equation was to determine the effectiveness of antismoking advertising on
television and radio. What is your conclusion?

2. First, using the EAEF data set, take the natural log of EARNINGS to form the transformed variable LGEARN. Then do problem 6.2 on page 207 of the text, repeated here for convenience:

Using your EAEF data set, regress LGEARN

(1) on S and EXP,

(2) on S only, and

(3) on EXP only.

Compare the coefficients of S in regressions (1) and (2). Give both mathematical and intuitive explanations of the direction of the change. Also compare the coefficients of EXP in regressions (1) and (3) and explain the direction of change.

3. Using the EAEF data set, regress LGEARN on S, EXP, and ASVABC. Use an F-test to determine whether S and EXP are jointly significant.

4. Using the EAEF data set, regress LGEARN on S, EXP, and ASVABC. Use an F-test to determine whether the coefficients on S and EXP are equal. ________________________________________________________

**Note**: Variable definitions (see pages. 443-444 in Appendix B of the
text):

EARNINGS = current hourly earnings in $ reported in 2002 interview.

S = Years of schooling (highest grade completed as of 2002).

EXP = Total out-of-school work experience (years) as of the 2002 interview.

ASVABC = Scaled standardized test score.

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