a) Consider a standard log(wage) equation for men under the assumption that all explanatory variables are exogenous. log(wage) = Bo + B1married + Bzeduc + uj i) ii) Explain the problem you would encounter if Cov(educ, u¡) # 0. What are the consequences of applying OLS to estimate the parameters in the model above in the face of the problem identified in (i)? iii) Explain the three main source of this problem. What is an instrumental variable? iv) Suppose Z is identified as an instrument variable for educ in the model above, explain the main conditions that this instrument satisfy for it to be a valid instrument. v) vi) Explain the two-stage least square (2SLS) method that you need to deal with the problem identified in (i). b) Give the following model.

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