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2010 Final

# 2010 Final - Economics 241B 2010 Final 1 You are studying...

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Economics 241B 2010 Final 1. You are studying the demand for the quality of public schools. As there are no good physical measures of the quality of public schools, you use expenditures in place of quality, with the logic that increases in expenditures are associated with increases in quality. You have the good fortune to observe E i , the level of expenditures per student desired by household i . The model you estimate is ln E i = ° 0 + ° 1 ln Tax i + ° 2 ln Income i + ° 3 K 11 i + ° 4 K 16 i + U i; (1) where Tax - increase in household taxes for an additional \$1 of expenditures Income - income after local taxes K 11 - # children age 1-11 K 16 - # children age 12-16. Let ^ ° denote the OLS estimator of the coe¢ cient vector, let x i indicate the vector of regressors (including a constant) for household i and let X = [ x 1 ; : : : ; x n ] 0 . a. Establish the truth, or falsehood, of each statement: E [ U i j X ] = 0 ) E [ U i j x i ] = 0 E [ U i j x i ] = 0 ) E [ U i j X ] = 0 : Which of the assumptions do you think are valid for the model of public school expenditures?

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