## Introductory Econometrics A Modern Approach 6th Edition by Jeffrey M. Wooldridge – Test Bank

Chapter 07

1. A _____ variable is used to incorporate qualitative information in a regression model.

a. dependent

b. continuous

c. binomial

d. dummy

ANSWER: d

RATIONALE: FEEDBACK: A dummy variable or binary variable is used to incorporate qualitative information in a regression model.

POINTS: 1

DIFFICULTY: Easy

NATIONAL STANDARDS: United States – BUSPROG: Analytic

TOPICS: Describing Qualitative Information

KEYWORDS: Bloom’s: Knowledge

2. In a regression model, which of the following will be described using a binary variable?

a. Whether it rained on a particular day or it did not

b. The volume of rainfall during a year

c. The percentage of humidity in air on a particular day

d. The concentration of dust particles in air

ANSWER: a

RATIONALE: FEEDBACK: A binary variable is used to describe qualitative information in regression model. Therefore, such a variable will be used to describe whether it rained on a particular day or it did not.

POINTS: 1

DIFFICULTY: Medium

NATIONAL STANDARDS: United States – BUSPROG: Analytic

TOPICS: Describing Qualitative Information

KEYWORDS: Bloom’s: Comprehension

3. Which of the following is true of dummy variables?

a. A dummy variable always takes a value less than 1.

b. A dummy variable always takes a value higher than 1.

c. A dummy variable takes a value of 0 or 1.

d. A dummy variable takes a value of 1 or 10.

ANSWER: c

RATIONALE: FEEDBACK: A dummy variable takes a value of 0 or 1.

POINTS: 1

DIFFICULTY: Easy

NATIONAL STANDARDS: United States – BUSPROG: Analytic

TOPICS: Describing Qualitative Information

KEYWORDS: Bloom’s: Knowledge

4. The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

Refer to the model above. The inclusion of another binary variable in this model that takes a value of 1 if a person is uneducated, will give rise to the problem of _____.

a. omitted variable bias

b. self-selection

c. dummy variable trap

d. heteroskedastcity

ANSWER: c

RATIONALE: FEEDBACK: The inclusion of another dummy variable in this model would introduce perfect collinearity and lead to a dummy variable trap.

POINTS: 1

DIFFICULTY: Moderate

NATIONAL STANDARDS: United States – BUSPROG: Analytic – BUSPROG: Analytic

TOPICS: Describing Qualitative Information

KEYWORDS: Bloom’s: Application

5. The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = β0 + 0 Edu + β1Inc + u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

Refer to the model above. The benchmark group in this model is _____.

a. the group of educated people

b. the group of uneducated people

c. the group of individuals with a high income

d. the group of individuals with a low income

ANSWER: b

RATIONALE: FEEDBACK: The benchmark group is the group against which comparisons are made. In this case, the savings of a literate person is being compared to the savings of an illiterate person; therefore, the group of illiterate people is the base group or benchmark group.

POINTS: 1

DIFFICULTY: Moderate

NATIONAL STANDARDS: United States – BUSPROG: Analytic – BUSPROG: Analytic

TOPICS: A Single Dummy Independent Variable

KEYWORDS: Bloom’s: Application

6. The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = β0 + 0 Edu + β1Inc + u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

Refer to the above model. If 0 > 0, _____.

a. uneducated people have higher savings than those who are educated

b. educated people have higher savings than those who are not educated

c. individuals with lower income have higher savings

d. individual with lower income have higher savings

ANSWER: b

RATIONALE: FEEDBACK: The coefficient 0 measures the impact of education on an individual’s annual savings. If it has a positive impact, as in this case, educated people should have higher savings.

POINTS: 1

DIFFICULTY: Moderate

NATIONAL STANDARDS: United States – BUSPROG: Analytic – BUSPROG: Analytic

TOPICS: A Single Dummy Independent Variable

KEYWORDS: Bloom’s: Application

7. The income of an individual in Budopia depends on his ethnicity and several other factors which can be measured quantitatively. If there are 5 ethnic groups in Budopia, how many dummy variables should be included in the regression equation for income determination in Budopia?

a. 1

b. 5

c. 6

d. 4

ANSWER: d

RATIONALE: FEEDBACK: If a regression model is to have different intercepts for, say, g groups or categories, we need to include g -1 dummy variables in the model along with an intercept. In this case, the regression equation should include 5-1=4 dummy variables since there are 5 ethnic groups.

POINTS: 1

DIFFICULTY: Moderate

NATIONAL STANDARDS: United States – BUSPROG: Analytic – BUSPROG: Analytic

TOPICS: Using Dummy Variables for Multiple Categories

KEYWORDS: Bloom’s: Application

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