Economics 1123 Midterm Exam | GRADED A

Department of Economics Economics 1123 Harvard University Fall 2020 Midterm Exam 9:00 a.m., Wednesday October 24, 2018 PACKET 2 Solutions in Calibri 11 Part 1 – USE BLUE BOOK #1 (60 points) 1) Consider regressions (1) and (2). a) (5 points) Interpret the coefficient on license in regression (1), in which the dependent variable is wage. The mean wage for workers with a license is $2.76 higher than for those without a license. b) (5 points) Based on the evidence in the tables and/or figures, is the regression error in regression (1) heteroskedastic or homoskedastic? Briefly explain. Heteroskedasticity is when the variance of the regression error depends on X. In regression (1), heteroskedasticity arises when the variance of wages differs for those with and without a license. Figure 1 suggests that it does, in particular the spread of the distribution of wages for those with a license exceeds that for those without a license. c) (5 points) Interpret the coefficient on license in regression (2), in which the dependent variable is log(wage). Is this coefficient large or small in a real-world sense? The mean wage for workers with a license is 18.9% higher than for those without a license. That is a lot in a real world sense, a 20% “raise”.