Introductory Econometrics: Solutions of Selected Exercises From Tutorial 1
Introductory Econometrics: Solutions of Selected Exercises From Tutorial 1
(xi 20)
y = n(
x 20) = i=1
.
n
As n grows, what happens to the distribution of y?
Solution: The Central limit theorem (CLT) states that the arithmetic average of n independent draws from a population with mean and variance 2 will be approximately normally
distributed with mean and variance n1 2 . More precisely, as n grows,
n(
x ) N (0, 2 ),
where denotes convergence in distribution. The strength of the CLT consists in that
normality is achieved regardless of the shape of the populations distribution (this is what
makes the normal distribution normal). In our case, we have
n(
x 20) N (0, 100).
Jan Zouhar
1) corr(x, y) = 1.56.
2) corr(x, y) = 0.28, cov(x, y) = 0.
3) corr(x, y) = 0.28, cov(x, y) = 0.5.
4) corr(x, y) = 0.28, cov(x, y) = 0.5.
Why? What is the relationship between the covariance and correlation coefficient of two rvs?
Solution: 1,2, and 3 cannot happen; 1 follows directly from g, 2 and 3 are easily seen from
cov(x, y)
corr(x, y) =
,
varx vary
which tells us that cov and corr either have the same sign, or are both zero.
Note: Exercises 1.12, 1.13, and 1.14 focus on conditional expectations and conditional variance. For
a brief treatment of the underlying theory, see Wooldridges textbook, Appendix B, pages 684688
(2nd edition).
Exercise 1.12 (Calculations with conditional expectations.)
a) Let x and y be independent rvs, Ey = 12.5. Find E[y |x].
Solution: Because x and y are independent, E[y |x] = Ey, i.e. E[y |x] = 12.5.
b) Let x and y be rvs, E[y |x] = 2 + 5x. Find E[4y + 3xy + x2 |x] and E[4y + 3xy + x2 |x = 5].
Solution: Well be using property CE.2 from Wooldridge, page 686:
E[4y + 3xy + x2 |x]
=
CE.2
=
=
Altogether, we have
E[4y + 3xy + x2 |x] = 16x2 + 26x + 8.
Substituting x = 5 into the right-hand side gives us
E[4y + 3xy + x2 |x = 5] = 1652 + 265 + 8 = 538.
Exercise 1.13 (Conditional expectations II.) Suppose that at a large university, college grade point
average, GPA, and SAT score, SAT , are related by the conditional expectation
E[GPA|SAT ] = .70 + .002 SAT .
(1)
a) Find the expected GPA when SAT = 800. Find E[GPA|SAT = 1,400]. Comment on the
difference.
Solution: This should be fairly easy:
E[GPA|SAT = 800] = .70 + .002800 = 1.67,
E[GPA|SAT = 1,400] = .70 + .0021,400 = 3.50 .
b) If the average SAT in the university is 1,100, what is the average GPA?
Solution: Well be using property CE.4 from Wooldridge, page 687 (the so-called Law of
iterated expectations):
CE.4
(1)
EGPA = E(E[GPA|SAT ]) = E(.70 + .002 SAT ) = .70 + .002 ESAT = .70 + .0021,100.
Exercise 1.14 (Conditional variance.) Do you think the variance of wages varies among groups of
people with different levels of education? E.g., is there a difference between var[wage|educ = 9] and
var[wage|educ = 18]?
Solution: The obvious answer is yes. I leave the explanation up to you. The exercise is only meant
as a practice of the conditional notation.
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