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									                                                                           Economics 403
                                                            Introduction to Econometrics
                                            Problem Set 6: Multiple Regression Assessment

NOTE: There is no Stata component to this homework assignment. Use the time to fine
tune your course papers.

   1. Use the following table to answer these questions:
      Dependent variable: ln(Price)
                         (1)                (2)               (3)               (4)
      Size               .00042
                         (.000038)
      Ln(Size)                              .69               .68               .57
                                            (.054)            (.087)            (2.03)
      Ln(Size)2                                                                 .0078
                                                                                (.14)
      Number of                                               .0036
      Bedrooms                                                (.037)
      Pool (Dummy        .082               .071              .071              .071
      var)               (.032)             (.034)            (.034)            (.036)
      Nice View          .037               .027              .026              .027
      (Dummy var)        (.029)             (.028)            (.026)            (.029)
      Excellent          .13                .12               .12               .12
      Condition          (.045)             (.035)            (.035)            (.036)
      (Dummy var)
      Intercept          10.97              6.60              6.63              7.02
                         (.069)             (.39)             (.53)             (7.50)

      SER                .102               .098              .099              .099
      R2                 .72                .74               .73               .73


          a.     Using the result of column (1), what is the expected change in price of
                 building a 500 square foot addition to a house? Be careful with your units.
                 Construct a 95% confidence interval for the percentage change in price.
          b.     Comparing columns (1) and (2), is it better to use Size or ln(Size) to explain
                 house prices?
          c.     Using column (2), what is the estimated effect of pool on price? Be careful
                 with your units.
          d.     The regression in column (3) adds the number of bedrooms to the regression.
                 How large is the estimated effect of an additional bedroom? Is the effect
                 statistically significant? Why do you think the estimated effect is so small?
          e.     Is the quadratic term ln(size)2 important?
2. Labor economists studying the determinants of women’s earnings discovered a puzzling
   result. Using randomly selected employed women, they regressed earnings on the
   women’s number of children and a set of control variables (age, education, occupation,
   and so forth). They found that women with more children had higher wages, controlling
   for these other factors. Explain how sample selection might be the cause of this result.
   (Hint: notice that the sample only includes women who are working.) (This empirical
   puzzle motivated James Heckman’s research on sample selection that led to his 2000
   Nobel Prize in economics.)

3. Evaluate these statements: “Measurement error in the X’s is a serious problem.
   Measurement error in Y is not.”

								
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