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Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge
Edition 6ISBN: 130527010XIntroductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge
Edition 6ISBN: 130527010XUse the data in TWOYEAR.RAW for this exercise.
(i) The variable stotal is a standardized test variable, which can act as a proxy variable for unobserved ability. Find the sample mean and standard deviation of stotal.
(ii) Run simple regressions of jc and univ on stotal. Are both college education variables statistically related to stotal? Explain.
(iii) Add stotal to equation and test the hypothesis that the returns to two- and four-year colleges are the same against the alternative that the return to four-year colleges is greater. How do your findings compare with those from Section 4.4?
(iv) Add stotal2 to the equation estimated in part (iii). Does a quadratic in the test score variable seem necessary?
(v) Add the interaction terms stotal-jc and stotal-univ to the equation from part (iii). Are these terms jointly significant?
(vi) What would be your final model that controls for ability through the use of stotal? Justify your answer.
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(i)
The variable 
is a standardized test variable which can act as a proxy variable for unobserved ability.
The samples mean of 
is given by
Where 
=sample mean of 
=the observation of 
Since,
that implies the sample mean of 
is:
The sample standard deviation of 
is given by
That implies, the standard deviation of 
is given by:
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