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Suppose you want to estimate the following model s Bat Biệt By 4 th where z is likely to be correlated with both z and y. You have cross-sectional data on z. y. and z. You do not observe z but only an imperfect measurement that we call g. g = az +w, where w is just random noise. Your friend. Federico, argues that if you want to estimate ₁ you should not include g in your estimation as it will just add noise. Is Federico's argument right or wrong? Explain.

Suppose you want to estimate the following model s Bat Biệt By 4 th where z is likely to be correlated with both z and y. You have cross-sectional data on z. y. and z. You do not observe z but only an imperfect measurement that we call g. g = az +w, where w is just random noise. Your friend. Federico, argues that if you want to estimate ₁ you should not include g in your estimation as it will just add noise. Is Federico's argument right or wrong? Explain.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose you want to estimate the following model y = Bo + Biz + B₂z + 1₂ where z is likely to be correlated with both z and y. You have cross-sectional data on z. y. and z. You do not observe z but only an imperfect measurement that we call g. g = az+w, where w is just random noise. Your friend, Federico, argues that if you want to estimate 3₁ you should not include g in your estimation as it will just add noise. Is Federico's argument right or wrong? Explain.
Transcribed Image Text:Suppose you want to estimate the following model y = Bo + Biz + B₂z + 1₂ where z is likely to be correlated with both z and y. You have cross-sectional data on z. y. and z. You do not observe z but only an imperfect measurement that we call g. g = az+w, where w is just random noise. Your friend, Federico, argues that if you want to estimate 3₁ you should not include g in your estimation as it will just add noise. Is Federico's argument right or wrong? Explain.
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