Name: Section #
I attest that I have completed this exam without unauthorized assistance from any person,
materials, or device.
Signature Date
Johns Hopkins University Economics 180.334
Spring 2014
Midterm # 2
Thursday, March 27, 2014
Instructions:
1. Time limit: 70 minutes
2. Total number of points is 70. The number of points for each problem indicates the
approximate time in minutes that should be allocated to the problem
3. The exam is closed book/notes. You are allowed to use a 1-sided, letter size, cheat
sheet
4. You can use a hand calculator. Cellphones/Smartphones are not allowed
5. To receive full credit for your answers, you have to explain your calculations
6. When you conduct a hypothesis test, please state clearly: the null hypothesis and
alternative hypothesis, the formula and value of your test statistics, acceptance or
rejection rules (based on correct critical values), and the outcome of your test
7. A standard normal distribution function and critical values for the χ2q distribution are
included at the back of this booklet.
8. No extra points this time.
Good luck!
1
, 1. One of the solutions to global warming that has been proposed by researchers is the
use of biofuels. In particular, consider the use of corn to produce gasoline. Some
researchers oppose to this solution by saying that this will increase the price for corn,
which is a main food staple in many countries. Some projections anticipate a 18%
increase in the price for corn.
To analyze the effect of this price increase on the quantity demanded of corn —for
food consumption— you propose to estimate the following model:
Qi = β0 + β1 Pi + β2 Yi + ui
where observations are countries, Qi is the quantity of corn demanded (for food con-
sumption) in country i (measured in metric tons), Pi is the price of corn (in US dollars)
in country i, and Yi is (mean) income in country i (in US dollars).
(a) [6] One of your classmates points out that
‘It is well known that income has a negative effect on the consumption
for corn (the higher the income, the more likely people will switch to
other sources of proteins, like meat). At the same time, higher income
allows people to pay higher prices, so these two variables are positively
correlated.’
Taking the previous quote as a fact, do you think the OLS estimator of β1 would
be biased? Why/why not? If you think there is omitted variable bias based on
the quote above, what is the sign of the bias? Show your work.
Answer: Based on the previous quote, we do not have evidence that β̂1 is biased.
Variables are allowed to be correlated, and often are, as long as they are included
in the regression–which is the case here.
2
I attest that I have completed this exam without unauthorized assistance from any person,
materials, or device.
Signature Date
Johns Hopkins University Economics 180.334
Spring 2014
Midterm # 2
Thursday, March 27, 2014
Instructions:
1. Time limit: 70 minutes
2. Total number of points is 70. The number of points for each problem indicates the
approximate time in minutes that should be allocated to the problem
3. The exam is closed book/notes. You are allowed to use a 1-sided, letter size, cheat
sheet
4. You can use a hand calculator. Cellphones/Smartphones are not allowed
5. To receive full credit for your answers, you have to explain your calculations
6. When you conduct a hypothesis test, please state clearly: the null hypothesis and
alternative hypothesis, the formula and value of your test statistics, acceptance or
rejection rules (based on correct critical values), and the outcome of your test
7. A standard normal distribution function and critical values for the χ2q distribution are
included at the back of this booklet.
8. No extra points this time.
Good luck!
1
, 1. One of the solutions to global warming that has been proposed by researchers is the
use of biofuels. In particular, consider the use of corn to produce gasoline. Some
researchers oppose to this solution by saying that this will increase the price for corn,
which is a main food staple in many countries. Some projections anticipate a 18%
increase in the price for corn.
To analyze the effect of this price increase on the quantity demanded of corn —for
food consumption— you propose to estimate the following model:
Qi = β0 + β1 Pi + β2 Yi + ui
where observations are countries, Qi is the quantity of corn demanded (for food con-
sumption) in country i (measured in metric tons), Pi is the price of corn (in US dollars)
in country i, and Yi is (mean) income in country i (in US dollars).
(a) [6] One of your classmates points out that
‘It is well known that income has a negative effect on the consumption
for corn (the higher the income, the more likely people will switch to
other sources of proteins, like meat). At the same time, higher income
allows people to pay higher prices, so these two variables are positively
correlated.’
Taking the previous quote as a fact, do you think the OLS estimator of β1 would
be biased? Why/why not? If you think there is omitted variable bias based on
the quote above, what is the sign of the bias? Show your work.
Answer: Based on the previous quote, we do not have evidence that β̂1 is biased.
Variables are allowed to be correlated, and often are, as long as they are included
in the regression–which is the case here.
2
