describes how people’s levels of education are distributed at different levels of wages.




Workshop 2: Topics 8-12




Student name:________________________________ID number:_________________



Section A. Multiple choice questions: [40 marks]



Indicate the correct answer in the box provided.


The following model relates a person i’s hourly wages (measured in £’) to his/her level of education (measured in years of schooling)




1.      In model [1], the conditional probability density function (CDF) of  given  f(|):


a.   describes how people’s levels of education are distributed at different levels of wages. 


b.   gives the probability of wages regardless of the level of education.


c.   gives the probability of the levels of education when the value of wages is fixed at a specific value.


d.   describes how people’s wages are distributed at each level of education. 



2.      In model [1], the term is:


a.   An estimator of the effects of education on hourly wages. 


b. An unknown fixed parameter that needs to be estimated.


c. An estimate of the symmetric relationship between education and wages.


d. A random variable with an unknown probability density function.



3.      With reference to model [1], the assumption of homoscedasticity implies that:


a.   the dispersion of the values of wages about their mean is the same for all levels of education.


b.   the dispersion of the levels of education about their mean is the same for all values of wages.


c.   the conditional probability distribution of wages given education increases at a constant rate with the levels of education. 


d.   the expected value of wages is the same for all levels of education. 




4.      In model [1], a high variance of the error term implies that the OLS estimators of  and  are:


a.   inconsistent 


b.   less disperse


c.  less precise


d.  unbiased




5.      An estimator of a population parameter is unbiased if:


a.   it has the smallest variance amongst all unbiased estimators.


b. it has the smallest variance amongst all linear estimators.


c. its expected value is equal to the population parameter.


d. its variance decreases as the sample size increases.



[8 marks each question]


Section B [60 marks]



You are interested in investigating the relationship between wages and experience in the UK using the following linear regression model:




Where  denotes a person i’s hourly earnings (measured in natural logarithm and  denotes years of experience.  


In order to estimate model [2], you collected information on hourly earnings and years of experience for 1000 randomly selected individuals in the UK and obtained the following OLS estimation using STATA:



 Using the above regression output:


a)     Construct a 95% confidence interval for  and interpret it.

[20 marks]





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