Chapter 7
1. A _____ variable is used to incorporate qualitative information in a regression model.
a. dependent
b. continuous
c. binomial
d. dummy
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
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.
4. 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
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.
5. 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
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.
6. 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
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
8. The quarterly increase in an employee’s salary depends on the rating of his work by his employer and
several other factors as shown in the model below:
Increase in salary= β0+∂0Rating + other factors. The variable ‘Rating’ is a(n) _____ variable.
a. dependent variable
b. ordinal variable
c. continuous variable
d. Poisson variable
9. Which of the following is true of Chow test?
a. It is a type of t test.
b. It is a type of sign test.
c. It is only valid under homoskedasticty.
d. It is only valid under heteroskedasticity.
10. Which of the following is true of dependent variables?
a. A dependent variable can only have a numerical value.
b. A dependent variable cannot have more than 2 values.
c. A dependent variable can be binary.
d. A dependent variable cannot have a qualitative meaning.
11. In the following regression equation, y is a binary variable:
y= β0+β1x1+…βk xk+ u
In this case, the estimated slope coefficient,β1
̂ measures _____.
a. the predicted change in the value of y when x1 increases by one unit, everything else remaining
constant
b. the predicted change in the value of y when x1 decreases by one unit, everything else remaining
constant
c. the predicted change in the probability of success when x1 decreases by one unit, everything else
remaining constant
d. the predicted change in the probability of success when x1 increases by one unit, everything else
remaining constant
12. Consider the following regression equation: y = β0+β1x1+…βk xk+ u
In which of the following cases, the dependent variable is binary?
a. y indicates the gross domestic product of a country
b. y indicates whether an adult is a college dropout
c. y indicates household consumption expenditure
d. y indicates the number of children in a family
13. Which of the following Gauss-Markov assumptions is violated by the linear probability model?
a. The assumption of constant variance of the error term.
b. The assumption of zero conditional mean of the error term.
c. The assumption of no exact linear relationship among independent variables.
d. The assumption that none of the independent variables are constants.
14. Which of the following problems can arise in policy analysis and program evaluation using a multiple
linear regression model?
a. There exists homoscedasticity in the model.
b. The model can produce predicted probabilities that are less than zero and greater than one.
c. The model leads to the omitted variable bias as only two independent factors can be included in the
model.
d. The model leads to an overestimation of the effect of independent variables on the dependent
variable.
15. Consider the following regression equation: y = β0+β1x1+…βk xk+ u
In which of the following cases, is ‘y’ a discrete variable?
a. y indicates the gross domestic product of a country
b. y indicates the total volume of rainfall during a year
c. y indicates household consumption expenditure
d. y indicates the number of children in a family
16. A binary variable is a variable whose value changes with a change in the number of observations.
17. A dummy variable trap arises when a single dummy variable describes a given number of groups.
18. The dummy variable coefficient for a particular group represents the estimated difference in
intercepts between that group and the base group.
19. The multiple linear regression model with a binary dependent variable is called the linear probability
model.
20. A problem that often arises in policy and program evaluation is that individuals (or firms or cities)
choose whether or not to participate in certain behaviors or programs.