ProblemSet9 Answers - Professor Mumford [email protected] Econ 360 Fall 2010 Problem Set 9 Answers True/False(16 points Please write the entire

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Professor Mumford Econ 360 - Fall 2010 [email protected] Problem Set 9 Answers True/False (16 points) Please write the entire word. No explanations are required. 1. FALSE Functional form misspecification is when the model does not properly ac- count for the relationship between the dependent and explanatory variables where the omitted variable is a function of included explanatory variables . 2. FALSE The F test is useful in detecting functional form misspecification. One can use it along with RESET and the Davidson-MacKinnon test to find the correct specification. 3. FALSE Measurement error in the dependent variable does not cause bias in the OLS estimators if the measurement error is uncorrelated with the explanatory variables , although it does increase the variance of the OLS estimators. 4. TRUE Under the classical errors-in-variables assumption, measurement error in an explanatory variable causes attenuation bias. Long Answer Questions (84 points) 5. Ability Proxy Variables (a) The estimated equation: d log ( wage ) = 5 . 395+ . 065 educ + . 014 exper + . 012 tenure + . 199 married - . 091 south + . 184 urban - . 188 black (b) Using IQ as a proxy for ability, the estimated return to education is .054 (as compared to .065 without an ability proxy). This suggests that the estimated return to education without controlling for ability is biased upward. (c) Using
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This note was uploaded on 02/06/2012 for the course ECON 360 taught by Professor Na during the Spring '10 term at Purdue University-West Lafayette.

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ProblemSet9 Answers - Professor Mumford [email protected] Econ 360 Fall 2010 Problem Set 9 Answers True/False(16 points Please write the entire

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