Econometrics assignment

Project description
You have data for 15-year old British students, and their results on a reading test. ‘read’ is the score in the reading test, ‘noroom’ is a dummy variable indicating

that the student does not have a room of her own at home, and ‘noeng’ is another dummy variable indicating that English is not spoken at home. Variable ‘fiction’ is an

integer from 1 to 5, indicating the student’s response to a question Do you like to read fiction?, where response 1 indicates not at all and 5 indicates Very much,

with values 2-4 being intermediate. You estimate two models as follows. The estimated standard errors are in parenthesis.
(Model 1) read = 499.3 20.8*noroom 45.3*noeng N = 11984, R2 = 0.020
(0.9) (2.9) (3.4)
(Model 2) read = 419.7 18.6*noroom 50.0*noeng + 29.4*fiction N = 11984, R2 = 0.204
(1.7) (2.6) (3.1) (0.6)

1. Using results of Model 2, interpret the coefficient for noroom, and test for the null hypothesis that the parameter is -20 against an alternative hypothesis that it

is larger (less negative) than -20, at 5% significance level. [20 marks]
2. Are students whose home language is not English, more or less eager readers of fiction than those who speak English at home? Please justify your answer. [25 marks]
Model 2 could still be further developed by instead of using variable fiction, creating separate dummy variables for each of the responses (1-5) and using them in the

estimation. Lets call those variables fic1, fic2, fic3, fic4, and fic5.
3. If you would run ‘Model 3’ where fiction is replaced with fic2, fic3, fic4 and fic5, what would be the interpretation of the estimated coefficient for fic3? [20

marks]
4. What could happen to R2 in the hypothetical ‘Model 3’? Be as precise as you can. [25 marks]
5. If you would have only one variable available to you (out of noroom, noeng and fiction) for your regression model, which one should you use to

maximise the explanatory power of your model? Justify your answer.

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