This preview shows pages 1–2. Sign up to view the full content.
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.
Then, if
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 10/03/2009 for the course ECON 3200 taught by Professor Neilsen during the Spring '08 term at Cornell University (Engineering School).
 Spring '08
 NEILSEN
 Econometrics

Click to edit the document details