Question 4 (25 Points) Consider the following causal diagram, which represents various factors influencing an individual's...

Transcribed Image Text:

Question 4 (25 Points) Consider the following causal diagram, which represents various factors influencing an individual's earnings based on a simple Human Capital Theory (HCT) model: QoS Fami) ParE Edu Abi Gen Earn Exp In this diagram, the variables are abbreviated as follows: "Exp" for Experience, "Edu" for Education, "Abi" for Ability, "Gen" for Gender, "QoS" for Quality of Schooling, "Faml" for Family Income, "ParE" for Parent Education, and "Earn" for Earnings. To understand the impact of education on earnings, you start with a simple regression model which has only a single regressor: Earn, Bo+BEdu, + u a) Interpret the u, based on the HCT model. (6 points) b) Based on the diagram, provide a multiple regression model that attempts to eliminate the omit- ted variable bias problem. (7 points) Page 8 c) Define and discuss the consequences of multicollinearity. Do you think your model in part (b) suffers from a multicollinearity problem? (6 points) d) Define and discuss the consequences of heteroscedasticity. Do you think your model in part (b) suffers from a heteroscedasticity problem? How would you solve the problem? (6 points) Question 4 (25 Points) Consider the following causal diagram, which represents various factors influencing an individual's earnings based on a simple Human Capital Theory (HCT) model: QoS Fami) ParE Edu Abi Gen Earn Exp In this diagram, the variables are abbreviated as follows: "Exp" for Experience, "Edu" for Education, "Abi" for Ability, "Gen" for Gender, "QoS" for Quality of Schooling, "Faml" for Family Income, "ParE" for Parent Education, and "Earn" for Earnings. To understand the impact of education on earnings, you start with a simple regression model which has only a single regressor: Earn, Bo+BEdu, + u a) Interpret the u, based on the HCT model. (6 points) b) Based on the diagram, provide a multiple regression model that attempts to eliminate the omit- ted variable bias problem. (7 points) Page 8 c) Define and discuss the consequences of multicollinearity. Do you think your model in part (b) suffers from a multicollinearity problem? (6 points) d) Define and discuss the consequences of heteroscedasticity. Do you think your model in part (b) suffers from a heteroscedasticity problem? How would you solve the problem? (6 points)

Answer rating: 100% (QA)

Certainly lets go through the questions stepbystep a Interpret the ui based on the HCT model In the context of the Human Capital Theory HCT model ui represents the error term in the linear regression ... View the full answer