Prepared by: John Amorante A Bao :: Economics Department of Xavier University-Ateneo de Cagayan :: 19th Sept 2008
 GROUP ONE
The Phillips curve says that the rate of change of money
wages is a function of the reciprocal of the
unemployment rate. Specifically, let
wt = money wage rate in year t
ut = unemployment rate in year t
w − w t −1
%∆w t = t × 100 = percentage rate of
w t −1
change in the wage rate
The Phillips curve is given by
1 suggest food is a luxury or a necessity? (Are the
%∆w t = β1 + β 2 + et
ut
where it is hypothesized that β1 < 0 and β2 > 0. Using the
observations on aggregate data given in the file
phillips.xls:
a Find least squares estimates for β1 and β2.
b Test whether there is a relationship between %∆w
and (1/u).
c Draw a graph of the estimated relationship with u on
the horizontal axis and %∆w on the vertical axis.
d Find the estimate for the “natural rate of
unemployment” (the natural rate of unemployment is
the rate for which %∆w = 0).
e Find estimates for d(%∆w)/du when u = 1 and when
u = 3.
f When does a change in the unemployment rate
have the greatest impact on the rate of change in
wages? When does it have the smallest?
g What is the economic meaning of β1 and what is
suggested by its estimate b1?
h Find 95 percent interval estimates for β1 and β2.
 GROUP TWO
The file london.xls is a cross section of 1,519
households drawn from the 1980-1982 British Family
Expenditure Surveys. Data have been selected to
include only households with one or two children living in
Greater London. Self-employed and retired households
have been excluded. The data were used by:
Richard Blundell, Alan Duncan, and Krishna Pendakur,
“Semiparametric Estimation and Consumer Demand,”
Journal of Applied Econometrics, Vol. 13, No. 5, 1998,
pp. 435-462.
List of variables
wfood = budget share for food expenditure
wfuel = budget share for fuel expenditure
wcloth = budget share for clothing expenditure
walc = budget share for alcohol expenditure
wtrans = budget share for transportation
expenditure
wother = budget share for other expenditures
totexp = total household expenditure (rounded to
the nearest 10 UK pounds sterling)
income = total net household income (rounded to
the nearest 10 UK pounds sterling)
age = age of household head
nk = number of children
The budget share of a commodity, say food, is defined
as
expediture on food
wfood =
total expenditur e
A functional form that has been popular for estimating
expenditure functions for commodities is
wfood = β1 + β2ln(totexp) + e
a Estimate this function for households with one child
and households with two children. Report and
comment on the results.
b It can be shown that expenditure elasticity for food is
given by
β + β 2 [ln(totexp) + 1]
η= 1
β1 + β 2 ln(totexp)
Find estimates of this elasticity for one- and two-
children households, evaluated at average total
expenditure in each case. Do these estimates
elasticities greater than one or less than one?)
 GROUP THREE
The file london.xls is a cross section of 1,519
households drawn from the 1980-1982 British Family
Expenditure Surveys. Data have been selected to
include only households with one or two children living in
Greater London. Self-employed and retired households
have been excluded. The data were used by:
Richard Blundell, Alan Duncan, and Krishna Pendakur,
“Semiparametric Estimation and Consumer Demand,”
Journal of Applied Econometrics, Vol. 13, No. 5, 1998,
pp. 435-462.
List of variables
wfood = budget share for food expenditure
wfuel = budget share for fuel expenditure
wcloth = budget share for clothing expenditure
walc = budget share for alcohol expenditure
wtrans = budget share for transportation
expenditure
wother = budget share for other expenditures
totexp = total household expenditure (rounded to
the nearest 10 UK pounds sterling)
income = total net household income (rounded to
the nearest 10 UK pounds sterling)
age = age of household head
nk = number of children
The budget share of a commodity, say fuel, is defined as
expediture on fuel
wfuel =
total expenditure
A functional form that has been popular for estimating
expenditure functions for commodities is
wfuel = β1 + β2ln(totexp) + e
a Estimate this function for households with one child
and households with two children. Report and
comment on the results.
b It can be shown that expenditure elasticity for fuel is
given by
β + β 2 [ln(totexp) + 1]
η= 1
β1 + β 2ln(totexp)
Find estimates of this elasticity for one- and two-
children households, evaluated at average total
expenditure in each case. Do these estimates
suggest fuel is a luxury or a necessity? (Are the
elasticities greater than one or less than one?)
 GROUP FOUR
Problem 1: Consider the food expenditure and income
data, i.e., file fdexin.xls.
List of variables
 Prepared by: John Amorante A Bao :: Economics Department of Xavier University-Ateneo de Cagayan :: 19th Sept 2008
yt = food expenditure
xt = weekly income
yt x
a Using your computer software (Excel®), create the variables y *t = and x *t = t .
100 100
b Estimate the following models and discuss the similarities and differences in the results:
i Regress y on x
ii Regress y on x*
iii Regress y* on x
iv Regress y* on x*

Problem 2: Does an increase in the concentration on arsenic in drinking water lead to an increase in the concentration of
arsenic in toenails? These concentrations were measured in 15 wells and in toenail clippings from 15 corresponding
people. The measurements in parts per million appear in the file arsen.xls. Let y = toenail concentration and x = water
concentration.
a Plot the following observations:
i y against x
ii ln(y) against ln(x)
iii y against ln(x)
iv ln(y) against x

ln = natural logarithm

Based on these plots, what functional form would you choose for relating y to x? Choose from listed in part (a).

b Estimate the following equations:

i yt = β1 + β2xt + et
ii ln(yt) = α1 + α2ln(xt) + et
iii yt = λ1 + λ2ln(xt) + et
iv ln(yt) = θ1 + θ2xt + et

Report the results. Does the level of arsenic in the water appear to influence the level of arsenic in the toenails?

 GROUP FIVE

You wish to investigate how dietary habits change with age. In the file diet.xls you have observations on the following
variables for 314 individuals:

AGE: age in years

FIBER: grams of fiber consumed per day
CALORIES: number of calories consumed per day
CHOL: cholesterol consumed in mg per day
FAT: grams of fat consumed per day

Estimate four equations with fiber, calories, cholesterol, and fat as the dependent variables and age as the explanatory
variable. Report the results and explain what you have discovered. Do you think age is a good predictor for dietary intake?