HW7_sol

# HW7_sol - ECON 414 SOLUTION TO HOMEWORK 7 Spring 2011 6.4(i...

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ECON 414 SOLUTION TO HOMEWORK 7 Spring 2011 6.4 (i) Holding all other factors fixed we have 1 2 1 2 log( ) ( ) . wage educ educ pareduc pareduc educ β = + = + Dividing both sides by ∆ educ gives the result. The sign of 2 is not obvious, although 2 > 0 if we think a child gets more out of another year of education the more highly educated are the child’s parents. (ii) We use the values pareduc = 32 and pareduc = 24 to interpret the coefficient on educ pareduc . The difference in the estimated return to education is .00078(32 – 24) = .0062, or about .62 percentage points. (iii) When we add pareduc by itself, the coefficient on the interaction term is negative. The t statistic on educ pareduc is about –1.33, which is not significant at the 10% level against a two-sided alternative. Note that the coefficient on pareduc is significant at the 5% level against a two-sided alternative. This provides a good example of how omitting a level effect ( pareduc in this case) can lead to biased estimation of the interaction effect. 6.8 (i) The answer is not entirely obvious, but one must properly interpret the coefficient on alcohol in either case. If we include attend , then we are measuring the effect of alcohol consumption on college GPA, holding attendance fixed. Because attendance is likely to be an important mechanism through which drinking affects performance, we probably do not want to hold it fixed in the analysis. If we do include attend , then we interpret the estimate of alcohol as measuring those effects on colGPA that are not due to attending class. (For example, we could be measuring the effects that drinking alcohol has on study time.) To get a total effect of alcohol consumption, we would leave attend out. (ii) We would want to include

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## This note was uploaded on 11/21/2011 for the course ECON 404 taught by Professor Carrillo during the Spring '11 term at USC.

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HW7_sol - ECON 414 SOLUTION TO HOMEWORK 7 Spring 2011 6.4(i...

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