Question: Consider the linear model y i = + x i + i in which Cov[x i , i ] = =

Consider the linear model y_i = α + βx_i + ε_i in which Cov[x_i, ε_i] = γ = 0. Let z be an exogenous, relevant instrumental variable for this model. Assume, as well, that z is binary—it takes only values 1 and 0. Show the algebraic forms of the LS estimator and the IV estimator for both α and β.

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