ECON2206 Assignment 2

# ECON2206 Assignment 2 - Assignment 2 Econ 2206 ecobuy = 0 1...

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Assignment 2- Econ 2206 ecobuy = β 0 + β 1 ecoprc + β 2 regprc + β 3 faminc + β 4 hhsize + β 5 educ + β 6 age + u Why the model is known as a linear probability model (LPM)? Comment on the interpretation of β 1. The model is known as a linear probability model (LPM) because it has a binary dependent variable namely ecobuy and the response probability is linear in the parameters. In the LPM, β1 is interpreted as changes in the probability of success (y=1 where family are buying ecolabeled apples) given a one dollar increase in the price of ecolabeled apples, holding all other factors fixed. b) Suppose that MLR1-4 hold for the model when all variables are correctly measured. Further suppose that one regressor, faminc, is measured with an additive error and the error is uncorrelated with the truth faminc* . How would the OLS estimator of, say, β 1 be affected by the measurement error and why?

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ECON2206 Assignment 2 - Assignment 2 Econ 2206 ecobuy = 0 1...

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