PS 5 - solutions

PS 5 - solutions - Problem Set 5 (from Stock and Watson...

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Problem Set 5 (from Stock and Watson solution key) 6.8. Omitted from the analysis are reasons why the survey respondents slept more or less than average. People with certain chronic illnesses might sleep more than 8 hours per night. People with other illnesses might sleep less than 5 hours. This study says nothing about the causal effect of sleep on mortality. 6.10.(a) 1 1 2 1 2 2 ˆ 2 2 , 1 1 1 u X X X n Assume X 1 and X 2 are uncorrelated: 1 2 2 0 X X 1 2 ˆ 1 1 4 400 1 0 6 1 4 1 0.00167 400 6 600 (b) With 1 2 , 0.5 X X 1 2 ˆ 2 1 1 4 400 1 0.5 6 1 1 4 .0022 400 0.75 6 (c) The statement correctly says that the larger is the correlation between X 1 and X 2 the larger is the variance of 1 ˆ , however the recommendation “it is best to leave X 2 out of the regression” is incorrect. If X 2 is a determinant of Y , then leaving X 2 out of the regression will lead to omitted variable bias in
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PS 5 - solutions - Problem Set 5 (from Stock and Watson...

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