Suppose you are interested in studying the effect of education on wages. You propose the following regression of annual salary on years of education and work experience:
wage=β0 +
β1 educ + β2exper + u
where
wage = annual salary
educ = years of formal education
exper = work experience
u = error term
In a simple regression analysis with educ as the only explanatory variable, the effects of other factors, such as exper, are . (options on blank are : a. contained in the intercept parameterβ0, B. contained in the error term u, C. contained in the slope parameterβ1, D. not contained in the model)
In the proposed multivariate regression, the effect of exper is . (options on blank are : a. removed from the error term and explicitly included in the regression equation, B. contained in the error term u, C. contained in the intercept parameter β0, D. contained in the slope parameter β1)
PART 2 An important assumption in the regression model with two independent variables is that E(u|x1,x2)=0. Assume for simplicity that the only other relevant factor (contained in the error term) that affects wage is natural ability. That is, natural ability and u are essentially equivalent in your regression.
In the context of your proposed regression, this assumption assumes which of the following?
a. Natural ability is, on average, unrelated to years of education but may be related to work experience.
b. Natural ability is, on average, unrelated to years of education and work experience.
c. Natural ability plays no role in influencing annual salary.
d. Natural ability is, on average, unrelated to work experience but may be related to years of education.