Assignment:
Please either print out the homework and write your solution on the homework or type your answer and print it out. Hint: The following questions are closely related to topics and examples we discussed in class, there are no direct answers from power point slides or textbook.
Question 1:
Consider the following one variable regression for the demand estimation:
quantity demanded=β0+β1 price+u
What do you expect to be the sign of β1?
Would the estimates of β1 be unbiased? why? (Hint: think about what is in the error term, and what assumption for the unbiasedness of OLS estimator is violated)
What should be the true sign of β1? Why it is different from the estimated sign from the above one variable regression? (Hint: think about what is in the error term, how does what included in the error term relates the included variable price and how does the error term relate to the dependent variable quantity demanded: refer to slide 21 in chapter 3's power point).
Question 2:
Consider the following multivariable regression for wage:
wage=β0+β1 male+β2 female+u
Where male is a dummy variable: male =1 if the individual is male; male =0 if the individual is female. Female is also a dummy variable: female =1 if the individual is female; female =0 if the individual is male.
What assumption does the above regression violate?
What is the solution for the above violation?