ECON 423 - Problem Set #1

Multiple Regression Models

Due: Thursday, September 18, by noon

Data: ps_1_data.xls (Excel Spreadsheet)

Introduction: This problem set is based on material in Chapter 6. This problem set is designed to familiarize you with the linear regression feature found in spreadsheets as well as concepts from Chapter 6 of the text.

Instructions: Open the spreadsheet ps_1_data.xls in Excel. This spreadsheet contains the following variables:

C_i: Consumption Expenditires in Solvia(Column A)
Y_i: National Income in Solvia (Column B)

Your answer to Question 1 below will be in a spreadsheet (Excel) file. Your answers to questions 2-6 will be in a word processor file (Word, Wordperfect, etc.). Name this wordprocessor file ps1xxxxxxx.doc (for a Word file). Attach both the spreadsheet file and the wordprocessor file to an e-mail and send it to me before Noon on Thursday, September 18.

Problem Set Question: Solvia is a closed primitive economy. It does not trade with foreign countries and it does not not have a government. The total product or total income in Solvia is used for consumption and investment

Use the OLS method to estimate all parameters of the following empirical models

Model 1: C_i = a₁ + b₁Y_i + e_1i
Model 2: C_i = a₂ + b₂Z_i + e_2i
Where Z=Y-C so Z is the value of autonomous investment expenditure in Solvovia. Save the spreadsheet with your regression output, and name the file ps1xxxxxxx.xls where "xxxxxxxx" is your last name.
Explain what the coeffecient estimates from the regression model mean.
Use a t-test to test the statistical significance of b₁ and b₂
Use the regression results from Model 1 to predict the mean value of C when Y=200. Construct a 95% confidence interval for this predicted value.
Explain each of these statistics from the regressions mean: R², SEE, S_e².
Explain what information you would need in order to use this model to predict the level of consumption expenditures in Solvia next year.