Answer as succinctly as possible while still fully answering the problem. Keep in mind that a simple “yes” or “no” answer is never sufficient – you are always expected to describe your reasoning

problem 1

Type the following command in Stata to load the MROZ dataset:

use http://fmwww.bc.edu/ec-p/data/wooldridge/MROZ, clear

This dataset contains information on married working women. Use the following command to keep only those women who are in the labor force:

keep if inlf==1

(a) Run an OLS regression of log wage (lwage) on years of schooling (educ). What are the returns to education? In order to address the concern that education may be correlated with unobserved factors such as ability, you would like to use mother’s years of schooling (motheduc) as an instrument for education.

(b) Theoretically speaking, is mother’s education a good instrument for education? describe your reasoning.

(c) Empirically, test whether mother’s education is a relevant instrument?

(d) Reestimate the model from part (a), but this time implement 2SLS using mother’s education as your instrument for education. Compare the economic and statistical significance of your estimated returns to education with your results from part (a).

Are the results similar?

(e) Which are higher – your standard errors in part (a) or your standard errors in part (d)? Is this as you would expect?