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Economics

Consider a simple model to estimate the effect of personal computer (PC) ownership on college grade point average (GPA), GPA = beta 0 + beta 1PC + u where PC is a binary variable indicating PC ownership. Why might PC ownership be correlated with the error term u? Would such a correlation present problems for the use of OLS estimation? Explain why PC is likely to be related to parent's income. Would parent's income be a good Instrumental Variable for PC? Why or why not? Suppose that, four years ago, the university gave computers to one - half of the new incoming students on a randomly selected basis. Explain how you would use this information to construct an instrumental variable for PC. Explain how you could use the instrumental variable from iv) above to test for the endogeneity of PC in this simple model.

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M9444477

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