Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 14

In Example 4.7, we used data on nonunionized manufacturing firms to estimate the relationship between the scrap rate and other firm characteristics. We now look at this example more closely and use all available firms.

(i) The population model estimated in Example 4.7 can be written as

log(scrap) = ?0 + ?1 hrsemp + ?2 log(sales) + ?3 log(employ) + u.

Using the 43 observations available for 1987, the estimated equation

Compare this equation to that estimated using only the 29 nonunionized firms in the sample.

(ii) Show that the population model can also be written as

where ?3 = ?2 + ?3. [Hint: Recall that log(x2/x3) = log(x2) — log(x3).] Interpret the hypothesis H0: ?3 = 0.

(iii) When the equation from part (ii) is estimated, we obtain

Controlling for worker training and for the sales-to-employee ratio, do bigger firms have larger statistically significant scrap rates?

(iv) Test the hypothesis that a 1% increase in sales/employ is associated with a 1% drop in the scrap rate.

Step 1 of 8

Consider the provided details to solve the subparts.

(i)

The estimated equation for 29 observations is as:

The coefficient of determination in old model is 0.262 and in new model is 0.310. Hence, in the new model explanatory variables explains more 31% variation in the dependent variable in comparison to 26.2% in old model. Hence, the new model having 43 observations is better than previous model.