Let’s return to the model of financial aid awards at a liberal arts college that was first introduced in Section 2.2. In that section, we estimated the following equation (standard errors in parentheses):

a. Create and test hypotheses for the coefficients of the independent variables.

b. What econometric problems do you see in the equation? Are there any signs of an omitted variable? Of an irrelevant variable? Explain your answer.

c. Suppose that you now hear a charge that financial aid awards at the school are unfairly tilted toward males, so you decide to attempt to test this charge by adding a dummy variable for gender (MALEi = 1 if the ith student is a male, 0 if female) to your equation, getting the following results:

d. Carefully explain the real-world meaning of the estimated coefficient of MALE. e. Which equation is better, Equation 6.22 or Equation 6.23? Carefully use our four specification criteria to make your decision, being sure to state which criteria support which equation and why.

(6.22) FINAID; = 8927 0.36 PARENT; + 87.4 HSRANK; (0.03) - 11.26 R2 = 0.73 (20.7) 4.22 N = 50 where: FINAID; = the financial aid (measured in dollars of grant) awarded to the ith applicant PARENT; = the amount (in dollars) that the parents of the ith student are judged able to contribute to college expenses HSRANK; = the ith student's GPA rank in high school, measured as a percentage (ranging from a low of 0 to a high of 100) FINAID; = 9813 0.34 PARENT + 83.3 HSRANK 1570 MALE; (784) (6.23) (0.03) - 10.88 R? = 0.75 (20.1) 4.13 -2.00 N = 50