Department Of Employment Has Hired You To Investigate The Relationship Between Workers Wages And The Amount They Smoke 1 (46.73 KiB) Viewed 61 times
Department Of Employment Has Hired You To Investigate The Relationship Between Workers Wages And The Amount They Smoke 2 (46.73 KiB) Viewed 61 times
Department of Employment has hired you to investigate the relationship between workers' wages and the amount they smoke. You decide to estimate the following linear model for wages: [1] log (Wages) = fo + B Age + B₂Cigarettes + u where: log (Wages) is the hourly wage (in logs) Age is the age (in years) (27 Cigarettes is the number of cigarettes smoked each year Suppose that you do not know the actual number of cigarettes workers smoke each year. Instead, you only measure of cigarette consumption Cigarettes comes from a survey which asks workers about the number of cigarettes they smoked in the previous year. You are concerned this measure contains errors such that Cigarettes = Cigarettes + v where u is measurement error. Given this, you estimate the following model: [2] log (Wages) = P + P Age + B₂Cigarettes + e Q1 [5 marks] Solve for the new error term in e in Equation [2]. Q2 [5 marks] Suppose you make the classical errors-in-variables (CEV) assumption, State what the CEV assumption is. What does that imply about the relationship between your measurement error and cigarette consumption? Q3 [5 marks] Do you think it is reasonable that this classical errors-in-variables assumption will hold in this case? Why or why not? Q4 [5 marks] What implications does the measurement error in the number of cigarettes consumed by workers have for your estimates of ? What are the implications for your estimate of ?
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