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ProblemSet8Ans

# ProblemSet8Ans - ECON 3200 Introduction to Econometrics...

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ECON 3200 Introduction to Econometrics Answers for Problem Set 8 Problem 1 (Wooldridge 15.1) 1. It has been fairly well established that socioeconomic status affects student performance. The error term u contains, among other things, family income, which has a positive effect on GPA and is also very likely to be correlated with PC ownership. 2. Families with higher incomes can afford to buy computers for their children. Therefore, family income certainly satisfies the second requirement for an instrumental variable: it is correlated with the endogenous explanatory variable [see (15.5) with x = PC and z = faminc ]. But as we suggested in part (i), faminc has a positive affect on GPA , so the first requirement for a good IV, (15.4), fails for faminc . If we had faminc we would include it as an explanatory variable in the equation; if it is the only important omitted variable correlated with PC , we could then estimate the expanded equation by OLS. 3. This is a natural experiment that affects whether or not some students own computers. Some students who buy computers when given the grant would not have without the grant. (Students who did not receive the grants might still own computers.) Define a dummy variable, grant , equal to one if the student received a grant, and zero otherwise.

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