Problem 1. Consider the following binary variable version of the fixed effects model. Each regressor is a binary variable that equals 1 when i = j and 0 otherwise. Note that the binary variable for the first group is arbitrarily omitted. Yit = Bo + B₁Xit +Y₂D2i + ... + YnDni + Uit, for i = 1,..., n, and t = 1, ..., T. (a) What is the slope and intercept for entity 3 in time period 1? (b) What is the slope and intercept for entity 2 in time period 3? (c) What is the slope and intercept for entity 1 in time period 3?

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Problem 1. Consider the following binary variable version of the fixed effects model. Each regressor
is a binary variable that equals 1 when i = j and 0 otherwise. Note that the binary variable for the
first group is arbitrarily omitted.
Yit = Bo + B₁Xit + √2D2i + ... + YnDni + Uit,
for i = 1,..., n, and t = 1,..., T.
(a) What is the slope and intercept for entity 3 in time period 1?
(b) What is the slope and intercept for entity 2 in time period 3?
(c) What is the slope and intercept for entity 1 in time period 3?
(d) How many different intercepts does this model have?
(e) Comment on what will happen if you estimate the model including D1, in STATA.
Transcribed Image Text:Problem 1. Consider the following binary variable version of the fixed effects model. Each regressor is a binary variable that equals 1 when i = j and 0 otherwise. Note that the binary variable for the first group is arbitrarily omitted. Yit = Bo + B₁Xit + √2D2i + ... + YnDni + Uit, for i = 1,..., n, and t = 1,..., T. (a) What is the slope and intercept for entity 3 in time period 1? (b) What is the slope and intercept for entity 2 in time period 3? (c) What is the slope and intercept for entity 1 in time period 3? (d) How many different intercepts does this model have? (e) Comment on what will happen if you estimate the model including D1, in STATA.
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