Consider the following model: Y i = 1 + 2 D i + u i
Question:
Consider the following model:
Yi = β1 + β2Di + ui
Where
Di = 0 for the first 20 observations and Di = 1 for the remaining 30 observations. You are also told that var (u2i) = 300.
a. How would you interpret β1 and β2?
b. What are the mean values of the two groups?
c. How would you compute the variance of (β̂1 + β̂2)? You are given that the cov (β̂1, β̂2) = −15.
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