iCONTENTSPREFACEiiiSUGGESTEDCOURSEOUTLINESivChapter1TheNatureofEconometricsandEconomicData1Chapter2TheSimpleRegressionModel6Chapter3MultipleRegressionAnalysis:Estimation19Chapter4MultipleRegressionAnalysis:Inference34Chapter5MultipleRegressionAnalysis:OLSAsymptotics48Chapter6MultipleRegressionAnalysis:FurtherIssues54Chapter7MultipleRegressionAnalysiswithQualitative71Information:Binary(orDummy)VariablesChapter8Heteroskedasticity89Chapter9MoreonSpecificationandDataProblems103Chapter10BasicRegressionAnalysiswithTimeSeriesData117Chapter11FurtherIssuesinUsingOLSwithTimeSeriesData129Chapter12SerialCorrelationandHeteroskedasticityin143TimeSeriesRegressionsChapter13PoolingCrossSectionsAcrossTime.Simple156PanelDataMethodsChapter14AdvancedPanelDataMethods172Chapter15InstrumentalVariablesEstimationandTwoStage187LeastSquaresChapter16SimultaneousEquationsModels205Chapter17LimitedDependentVariableModelsandSample219SelectionCorrectionsiiChapter18AdvancedTimeSeriesTopics243Chapter19CarryingOutanEmpiricalProject259AppendixABasicMathematicalTools260AppendixBFundamentalsofProbability263AppendixCFundamentalsofMathematicalStatistics265AppendixDSummaryofMatrixAlgebra269AppendixETheLinearRegressionModelinMatrixForm271iiiPREFACEThismanualcontainssuggestedcourseoutlines,teachingnotes,anddetailedsolutionstoalloftheproblemsandcomputerexercisesinIntroductoryEconometrics:AModernApproach,5e.Forseveralproblems,Ihaveaddedadditionalnotesaboutinterestingasidesorsuggestionsforhowtomodifyorextendtheproblem.Someoftheanswersgivenherearesubjective,andyoumaywanttosupplementorreplacethemwithyourownanswers.IwroteallsolutionsasifIwerepreparingthemforthestudents,soyoumayfindsomesolutionsabittedious(ifnotborderingonaninsulttoyourintelligence).Thisway,ifyouprefer,youcandistributemyanswerstosomeoftheeven-numberedproblemsdirectlytothestudents.(Thestudentstudyguidecontainsanswerstoallodd-numberedproblems.)ManyoftheequationsintheWordfileswerecreatedusingMathType,andtheequationswillnotlookquiterightwithoutMathType.SomeequationsIhavecreatedusingtheequationeditorinWord2007.IsolvedthecomputerexercisesusingvariousversionsofStata,startingwithversion4.0andrunningthroughversion12.0.Nevertheless,almostalloftheestimationmethodscoveredinthetexthavebeenstandardized,anddifferenteconometricsorstatisticalpackagesshouldgivethesameanswers.Therecanbedifferenceswhenapplyingmoreadvancedtechniques,asconventionssometimesdifferonhowtochooseorestimateauxiliaryparameters.(Examplesincludeheteroskedasticity-robuststandarderrors,estimatesofarandomeffectsmodel,andcorrectionsforsampleselectionbias.)WhileIhaveendeavoredtomakethesolutionsmistake-free,someerrorsmayhavecreptin.Iwouldappreciatehearingfromyouifyoufindmistakes.Iwillupdatethemanualoccasionallyandcorrectanymistakesthathavebeenfound.Iheardfrommanyofyouregardingtheearliereditionsofthetext,andIincorporatedmanyofyoursuggestions.Iwelcomeanycommentsthatwillhelpmemakeimprovementstofutureeditions.Icanbereachedviae-mailatwooldri1@.msu.edu.Thefiftheditionofthetextdropsthechapternumbersprecedingtheproblemsandcomputerexercises.Ihavekeptthechapternumbersinthesolutionsmanualsothatitiseasytokeeptrackofwhereoneis.Forexample,thesolutiontoproblem4inchapter3islabeled3.4andcomputerexercise6inchapter8islabeledC8.6.Ihopeyoufindthisinstructor’smanualuseful,andIlookforwardtohearingyourreactionstothefifthedition.JeffreyM.WooldridgeDepartmentofEconomicsMichiganStateUniversity486W.CircleDrive110Marshall-AdamsHallEastLansing,MI48824-1038ivSUGGESTEDCOURSEOUTLINESForanintroductory,one-semestercourse,IliketocovermostofthematerialinChapters1through8andChapters10through12,aswellaspartsofChapter9(butmostlythroughexamples).Idonottypicallycoverallsectionsorsubsectionswithineachchapter.Underthechapterheadingslistedbelow,IprovidesomecommentsonthematerialIfindmostrelevantforafirst-semestercourse.Analternativecourseignorestimeseriesapplicationsaltogether,whiledelvingintosomeofthemoreadvancedmethodsthatareparticularlyusefulforpolicyanalysis.ThiswouldconsistofChapters1through8,muchofChapter9,andthefirstfoursectionsofChapter13.Chapter9discussesthepracticallyimportanttopicsofproxyvariables,measurementerror,outlyingobservations,andstratifiedsampling.Inaddition,Ihavewrittenamorecarefuldescriptionofthemethodofleastabsolutedeviations,includingadiscussionofitsstrengthsandweaknesses.Chapter13covers,inastraightforwardfashion,methodsforpooledcrosssections(includingtheso-called“naturalexperiment”approach)andtwo-periodpaneldataanalysis.Thebasiccross-sectionaltreatmentofinstrumentalvariablesinChapter15isanaturaltopicforcross-sectional,policy-orientedcourses.Foranacceleratedcourse,thenonlinearmethodsusedforcross-sectionalanalysisinChapter17canbecovered.Itypicallydonotbeginwithareviewofbasicalgebra,probability,andstatistics.Inmyexperience,thistakestoolongandthepayoffisminimal.(Studentstendtothinkthattheyaretakinganotherstatisticscourseandstarttodriftawayfromthematerial.)Instead,whenIneedatool(suchasthesummationorexpectationsoperator),Ibrieflyreviewthenecessarydefinitionsandkeypropert