Answer Happy

Please answer all the questions. Thanks.
Question 3 (12 marks) We are interested in evaluating the effect of education (Edu) on wages (log(w)). Consider the following equation: log(w:) = do + a Edu; + ui. = We suspect though that wage is also effected by the unobserved ability (a) of individual i. The full relationship is given by the following equation: log(w) = Bo + B. Edu; + B2a; + vi Assume that education and ability are also related by the following relationship: a; = yEdu ; 1. Derive the relationship between â, and B1, B2, y. Give all details of your derivation 2. Explain when omitted variables bias would not be a problem in this case, intuitively and mathematically. 3. If there is an omitted variables bias what is its sign and how is it related to the signs of ß2 and y?