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practice_midterm_solutions

practice_midterm_solutions - ECO 120 Fall 2007 Practice...

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ECO 120, Fall 2007 Practice Problems for Midterm Solutions Professor Jon Robinson 1. (a) i. b ° 1 is likely to be biased since those that actually took the drug are di/erent than those that didn°t. ii. A. b ± 0 = 0 , the percentage of people in the control group who took the drug. b ± 0 + b ± 1 = 0 : 95 , the percentage of people that took the drug in the treatment group, so b ± 1 = 0 : 95 . B. From the t-stat, being sampled for treatment is strongly correlated with taking the drug. In addition, being sampled for treatment is completely random and so should be uncorrelated with labor supply, independent of its e/ect on the probability of taking the drug. Therefore, being sampled for treatment seems like a good instrument for taking the drug. (b) While parent°s income is indeed strongly correlated with years of education, it is likely that parent°s income also has an independent e/ect on log income, so parent°s income is unlikely to be a good instrument for years of education.
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