Introductory Econometrics A Modern Approach 5th Edition Wooldridge Solutions Manual
Introductory Econometrics A Modern Approach 5th Edition Wooldridge Solutions Manual
CHAPTER 2
TEACHING NOTES
This is the chapter where I expect students to follow most, if not all, of the algebraic derivations.
In class I like to derive at least the unbiasedness of the OLS slope coefficient, and usually I
derive the variance. At a minimum, I talk about the factors affecting the variance. To simplify
the notation, after I emphasize the assumptions in the population model, and assume random
sampling, I just condition on the values of the explanatory variables in the sample. Technically,
this is justified by random sampling because, for example, E(ui|x1,x2,…,xn) = E(ui|xi) by
independent sampling. I find that students are able to focus on the key assumption SLR.4 and
subsequently take my word about how conditioning on the independent variables in the sample is
harmless. (If you prefer, the appendix to Chapter 3 does the conditioning argument carefully.)
Because statistical inference is no more difficult in multiple regression than in simple regression,
I postpone inference until Chapter 4. (This reduces redundancy and allows you to focus on the
interpretive differences between simple and multiple regression.)
You might notice how, compared with most other texts, I use relatively few assumptions to
derive the unbiasedness of the OLS slope estimator, followed by the formula for its variance.
This is because I do not introduce redundant or unnecessary assumptions. For example, once
SLR.4 is assumed, nothing further about the relationship between u and x is needed to obtain the
unbiasedness of OLS under random sampling.
Incidentally, one of the uncomfortable facts about finite-sample analysis is that there is a
difference between an estimator that is unbiased conditional on the outcome of the covariates and
one that is unconditionally unbiased. If the distribution of the 𝑥𝑖 is such that they can all equal
the same value with positive probability – as is the case with discreteness in the distribution –
then the unconditional expectation does not really exist. Or, if it is made to exist then the
estimator is not unbiased. I do not try to explain these subtleties in an introductory course, but I
have had instructors ask me about the difference.
2.1 (i) Income, age, and family background (such as number of siblings) are just a few
possibilities. It seems that each of these could be correlated with years of education. (Income
and education are probably positively correlated; age and education may be negatively correlated
because women in more recent cohorts have, on average, more education; and number of siblings
and education are probably negatively correlated.)
(ii) Not if the factors we listed in part (i) are correlated with educ. Because we would like to
hold these factors fixed, they are part of the error term. But if u is correlated with educ then
E(u|educ) ≠ 0, and so SLR.4 fails.
2.2 In the equation y = β0 + β1x + u, add and subtract α0 from the right hand side to get y = (α0 +
β0) + β1x + (u − α0). Call the new error e = u − α0, so that E(e) = 0. The new intercept is α0 +
β0, but the slope is still β1.
n
2.3 (i) Let yi = GPAi, xi = ACTi, and n = 8. Then x = 25.875, y = 3.2125, ∑ (xi – x )(yi – y ) =
i=1
n
5.8125, and ∑ (xi – x )2 = 56.875. From equation (2.9), we obtain the slope as β̂1 =
i=1
5.8125/56.875 ≈ .1022, rounded to four places after the decimal. From (2.17), β̂ 0 = y – β̂1 x
≈ 3.2125 – (.1022)25.875 ≈ .5681. So we can write
GPA = .5681 + .1022 ACT
n = 8.
The intercept does not have a useful interpretation because ACT is not close to zero for the
population of interest. If ACT is 5 points higher, GPA increases by .1022(5) = .511.
(ii) The fitted values and residuals — rounded to four decimal places — are given along with
the observation number i and GPA in the following table:
7
i GPA GPA û
1 2.8 2.7143 .0857
2 3.4 3.0209 .3791
3 3.0 3.2253 –.2253
4 3.5 3.3275 .1725
5 3.6 3.5319 .0681
6 3.0 3.1231 –.1231
7 2.7 3.1231 –.4231
8 3.7 3.6341 .0659
You can verify that the residuals, as reported in the table, sum to −.0002, which is pretty close to
zero given the inherent rounding error.
n
(iv) The sum of squared residuals, ∑ uˆi2 , is about .4347 (rounded to four decimal places),
i =1
n
and the total sum of squares, ∑ (yi – y )2, is about 1.0288. So the R-squared from the regression
i=1
is
Therefore, about 57.7% of the variation in GPA is explained by ACT in this small sample of
students.
2.4 (i) When cigs = 0, predicted birth weight is 119.77 ounces. When cigs = 20, bwght = 109.49.
This is about an 8.6% drop.
(ii) Not necessarily. There are many other factors that can affect birth weight, particularly
overall health of the mother and quality of prenatal care. These could be correlated with
cigarette smoking during birth. Also, something such as caffeine consumption can affect birth
weight, and might also be correlated with cigarette smoking.
(iii) If we want a predicted bwght of 125, then cigs = (125 – 119.77)/( –.524) ≈ –10.18, or
about –10 cigarettes! This is nonsense, of course, and it shows what happens when we are trying
to predict something as complicated as birth weight with only a single explanatory variable. The
largest predicted birth weight is necessarily 119.77. Yet almost 700 of the births in the sample
had a birth weight higher than 119.77.
8
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10. But I perceive my body to be composed of flesh and bones; and
not constituting my rational self; which like the lotus flower rises amidst
the waters, without bearing any relation with that element.
11. I find the flesh of my body, to be dull and gross matter which do
not make my soul; and I find too my rational part to be not this gross
flesh at all. So do I find my bones likewise to be insensible substances,
and consequently forming no part of my sentient soul.
12. I am none of the organs of action, nor do these organs compose
myself. All organic bodies are composed of gross matter, and do not
consequently constitute the animated soul.
13. I am not the nourishment, which nourishes the body and not the
soul which makes myself; nor am I any organs of sense, which perceives
the material impressions, and have no sensibility without the intellect.
14. I am not the mind which is a passive agent, and minds whatever
is felt by it. It is called the understanding (buddhi) from its standing
under all its external and internal perceptions and conceptions (bodha),
and is the root of all worldly evils caused by its egoistic feelings.
15. Thus I am neither the mind nor understanding, nor the internal
senses nor the external organs of action. I am not the inward subtile
body, nor its outward material and self locomotive form, but am
something besides all of these which I want to know.
16. I see at last my intelligent living soul, reflecting on the
intelligibles, thence called its intelligence. But this intelligent principle
being roused (to its action of thinking) by others (the intelligibles), does
not come under the category (padártha) of the soul—átmá (which is
independent, and self-consciousness only).
17. Thus I renounce the knowable (living soul), and do not
acknowledge the intelligible intelligence as myself. It is at the end of all
the immutable and pure Intellect, which remains to be owned as myself.
18. Ah! it is wonderful at last, that I have come to know the soul after
so long a time, and find it to be myself the infinite soul, and the Supreme
Spirit which has no end.
19. As Indra and the gods reside and are resolved in Brahma, so the
spirit of God pervades through all material bodies, as the string of the
necklace, passes through the poles of all the pearls of which it is
composed. (This all pervasive soul is known as sútrátmá, one of the ten
hypostases of the Divinity).
20. The power of the soul known as intellect, is pure and unsullied in
its nature; it is devoid of the dirt of thinkable objects, and fills the infinite
space with its immense and stupendous figure. (The omniscience of God
comprehends the whole universe in itself, and pervades all through it as
the subtile air).
21. The intellect is devoid of all attributes, and pervades all
existences in its subtile form; stretches itself from the highest empyrean
of heaven to the lowest deep, and is the reservoir of all power.
22. It is replete with all beauty, and is the light that enlightens all
objects unto us; it is the connecting chain to which all the worlds are
linked together like pearls in the necklace.
23. It is formless but capable of all forms and mutations; being
connected with all matters, and conversant with all subjects at all times.
(The intellect embraces all subjects and its subjective knowledge
comprehends all objects). It has no particular name nor form, but is taken
as varied into different forms, according to the operations of the intellect.
24. It assumes fourteen forms in its cognition of so many sorts of
beings contained in the two wombs of the world; it is varied in all these
forms, in order to take cognizance of all things composing the whole
body of the natural world. (The intellect comprises the fourteen sciences
of Sanskrit literature over which it bears its command. Another gloss
means by it the fourteen worlds, which are under the cognizance and
dominion of the intellect).
25. The course of human happiness and misery, is a false
representation of the understanding; and the varieties of representations
in the mind, are mere operations of the soul and its attribute of the
Intellect. (Here the mental sciences are meant to be subordinate to the
intellectual, and that again under the psychological).
26. Thus this soul of mine is the same with the All pervading spirit;
and this understanding in me, is no other than that All knowing intellect.
It is the same mind, that represents these imaginary images in the
sensory of my mind, and causes the error of my kingship in me.
27. It is by good grace of the Intellect, that the mind is seated in the
vehicle of the body; and ranges with joy amidst the sports and diversions
of the diversified scenes of this world.
28. But this mind and this body and all diversities are nothing in
reality; they are all destroyed by the cruel hand of death, and not a
vestige of them remains behind. (But the soul and its intellect are
indestructible).
29. This world is a stage, stretched out by the mind its chief actor,
and the soul sits silent as a spectator of this scene, under the light of the
intellect.
30. Alas, I find these painful thoughts of mine for the punishment,
retribution and well being of my people, to be all for nothing; since
whatever is done for the body, perishes with the body also.
31. O, that I am awakened to truth at present, and released from the
mirage of my false views long before; I have come to see what is worth
seeing, and have found all that is worthy to be had.
32. All these visibles which are seen to be wide spread throughout
this universe, are no more than false phantoms, presented or produced by
the vibrations of the intellect; and do not last for long.
33. What is the good then of these my punishments and rewards to
my people, which produce their pain and pleasure for a short time, and
do not lead to the lasting welfare of their souls.
34. What mean these pains and pleasures to us, when they both
proceed from ourselves, and are alike in the sight of God? I had been all
along ignorant of this truth, which has fortunately now dawned upon me.
35. What shall I now do under the influence of this light; shall I now
be sorry or joyous for it; what have I now to look at and do, as to
whether I shall now remain in this place or go away from here?
36. I behold this wondrous sphere of the intellect, now shining upon
me in its full splendour; and I hail thee, O holy light! which I see blazing
before me, but of which I can predicate nothing.
37. Ah! that I am now so awakened and enlightened and come to
know the whole truth in me; I hail, therefore, myself now instinct with
infinity and Omniscience.
38. Being freed from the paintings of my mind, and cleared from the
dross of the sensible objects, and also released from the errors of this
world; I rest myself, in the lap of my tranquil soul, as in a state of sound
sleep, and in utter oblivion of all my internal and external impressions.
CHAPTER LX.
E S .
Argument. Seclusion of Suraghu until his last moment,
and his liberation in his lifetime.