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    of 3

    Lunar International College

    School of Business and Economics


    Postgraduate Studies
    Department of Project Management
    Home Take Exam/ Work Sheet/

    Assignment #2: Home Take Exercise #2


    Year: I; Semester: I

    Target: 1st year Post Graduate Students (Weekend/Regular/Night)


    Submission Date: 30 December 2022

    Instructor: Tesfaye E. (Ass.Prof.)


    ________________________________________________________________________
    Instructions:
    • Please show all your work precisely and to the point. Your hand right must be readable
    (legible) otherwise you are the risk taker. If you need more space, use the back of the
    page beyond that report to your invigilator.

    Part I: Long and Short Essay Questions


    1. Introduction: The economic (Management) theories we have learnt in various economics
    (management) courses suggest many relationships among economic (management) variables.
    Each of such specifications involves a relationship among economic variables. As
    economists, we may be interested in questions such as: If one variable changes in a certain
    magnitude, by how much will another variable change? Also, given that we know the value
    of one variable; can we forecast or predict the corresponding value of another, and
    Econometrics is a combination of economic theory, mathematical economics, mathematical
    statistics, and economic statistics but it is completely distinct from each one of these four
    branches of science. Having this refreshment, answer the following questions accordingly.
    A. What makes Econometrics special from other subject of economics;
    specifically, mathematical statistics, economic statistics, economic theory, and
    mathematical economics? Discuss in detail, and distinguish them.
    B. Discuss in detail “the methodology of Econometrics (Approach of
    Econometrics) that any investigator must follow when he/she plan to do
    her/his research by using econometric, and USE YOUR OWN EXAMPLE
    in discussing each approach.”
    2. What are the goals of econometrics and explain it USING YOUR OWN EXAMPLE? What
    is the difference between theoretical & applied econometrics? Explain briefly.
    3. Methodology of Econometrics: Suppose you have planned to do your post graduate studies
    on “Factors that affect household saving in urban Ethiopia: The case of Woliso town.”

    1|Page Prepared by: Tesfaye Etensa (Ass. Prof.)


    Furthermore, your target population is Woliso town dwellers, and proposed to collect data
    from 400 sampled households. Having, this argument in your mind, answer the below
    questions by following the steps of econometric methodology.
    A. What the economic theory states?
    B. Mathematical model of the theory
    a. Selecting variables (i.e identify regressors and regressand)
    b. A priori expectation of the sign of the parameters
    c. Magnitude of the parameter
    d. What do you thing the functional form of the equation? (Hint: Linear or
    non linear)
    e. How many numbers of equations we can develop? (Hint: single, two, etc)
    f. Specification of the mathematical model
    g. Specification of the Econometric model
    C. Obtaining data; how many sample size and which type of data was used
    for this analysis?
    D. Which techniques (methods) estimation is appropriate for such title?
    Justify it. (Hint: OLS, logit, probit)
    E. After estimation & obtaining values of the coefficient say,  0 & 1 of the
    variable we have to evaluate the results obtained whether the estimates of
    the parameters are theoretically meaningful and statistically satisfactory.
    Hence, discuss in detail the steps apply to evaluate the reliability of the
    estimates?
    4. Optimal properties of Ordinary least square method: What are the properties that make the
    OLS estimators BLUE? And what are the advantages of properties of BLUE as compared to
    other methods of Econometrics?
    Part II: Easy and Sophisticated Problems
    5. Estimation, evaluation, prediction and interpretation: Based on below information answer
    the following questions: Suppose that the salary of a given employment is depending on
    only years of experience. Test the hypothesis that salary is experience elastic by fitting
    regression line to the data given & conducting the relevant test of significance.
    Observation Y (Salary in ‘000 birr) X (Years of experience)
    1 30 24
    2 20 13
    3 36 16
    4 24 22
    5 40 27
    ∑
    A. OLS estimators: Estimate of the econometric model; ˆ0 & ˆ1 .
    B. Regression line: What will be the estimated regression line?
    C. ESS and RSS: Find the explained and unexplained variation in the salaries.
    D. Priori criteria, statistical (1st order test): Recall that after we have estimated &
    obtaining values of the coefficient ˆ0 & ˆ1 of the variable we should have to evaluate

    2|Page Prepared by: Tesfaye Etensa (Ass. Prof.)


    the results obtained using three criteria before predict power of our model and
    interpret the results. Thus, based on these three criteria compute the following.
    a. Do you think the model passes a prior economic criterion? Briefly Justify.
    b. Compute the square of correlation coefficient (or coefficient of determination)
    and interpret it.
    c. Compute the standard error of the regression estimates and test the statistical
    reliability of the estimated parameters.
    d. Conduct student (t) tests of significance at the 5% significant level and test the
    statistical reliability of the estimated parameters (Hint:  = 0.05; t 0.025 = 3.182
    3

    ).
    e. Find the 95% confidence interval for the population parameter (β0 and β1) and
    interpret (Hint:  = 0.05; t 0.025 = 3.182 )
    3

    f. If probability value (P-Value) for ˆ0 & ˆ1 , 0.000594 and 0.120456
    respectively, what is your decision regarding the reliability our estimated
    coefficients?
    E. Assumption of OLS or Econometric criteria: What are second order tests? Or (Lists
    the assumptions of OLS).
    F. Point, individual and mean (conditional average) prediction: Predict:
    a. the point with a 7 years of experience.
    b. the value of salary and check the reliability of the prediction (Hint:
     = 0.05; t 0.025 = 3.182 ).
    3

    c. the average value of salary, with a 7 years of experience and check the reliability
    of the prediction. (Hint:  = 0.05; t 0.025 = 3.182 ).
    3

    G. Interpretation: Interpret the parameters ( ˆ0 & ˆ1 ).


    Bonus
    • Elasticity: Calculate elasticity of salary with respect to year of experience at their
    mean value and interpret your result.

    Good luck@ being committed!

    3|Page Prepared by: Tesfaye Etensa (Ass. Prof.)

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