13 For bungee to be a valid proxy for riskaverse, it must be Uncorrelated with the error term Uncorrelated with B2 Uncorrelated with risk averse Uncorrelated with price

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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6
14
For bungee to be a valid proxy for riskaverse, it
must be
Correlated with price and u
Correlated with riskaverse and price
should contain additional information on
riskaverse
Correlated with price and riskaverse
Correlated with riskaver se and price
should contain no additional information on
riskaverse
15
Which of the following statements is correct if there is
random measurement error in the dependent variable
y?
OLS estimates will be biased
Hypothesis tests will be invalid
OLS estimates will be inconsistent
Standard errors will be larger
Transcribed Image Text:14 For bungee to be a valid proxy for riskaverse, it must be Correlated with price and u Correlated with riskaverse and price should contain additional information on riskaverse Correlated with price and riskaverse Correlated with riskaver se and price should contain no additional information on riskaverse 15 Which of the following statements is correct if there is random measurement error in the dependent variable y? OLS estimates will be biased Hypothesis tests will be invalid OLS estimates will be inconsistent Standard errors will be larger
Proxy Variables
The following equation relates a binary indicator for
having health insurance coverage to price and a binary
indicator for being averse to risk:
insured =
Bo + Bıprice + Bariskaverse + u
Suppose that data on riskaverse is not available but
data on bungee is available. The variable bungee is one if
the person has done bungee jumping at least once in the
past 6 months and zero otherwise.
13
For bungee to be a valid proxy for riskaverse, it
must be
Uncorrelated with the error term
Uncorrelated with B2
Uncorrelated with risk averse
Uncorrelated with price
Transcribed Image Text:Proxy Variables The following equation relates a binary indicator for having health insurance coverage to price and a binary indicator for being averse to risk: insured = Bo + Bıprice + Bariskaverse + u Suppose that data on riskaverse is not available but data on bungee is available. The variable bungee is one if the person has done bungee jumping at least once in the past 6 months and zero otherwise. 13 For bungee to be a valid proxy for riskaverse, it must be Uncorrelated with the error term Uncorrelated with B2 Uncorrelated with risk averse Uncorrelated with price
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