Suppose That You Have Many Observations of the Employee Level

question 45

Multiple Choice

Suppose that you have many observations of the employee level longevity and the wage earned by that employee that year. You run the regression Longevity_i = β₀ + β₁ Wage_i +U_i, and get an estimate of β₁. Now, suppose that a member of the analytics team suggests that education is an omitted variable in your regression and is likely biasing your estimate of β₁. Suppose you knew that, conditional on Wage, more educated employees tended to have shorter stints with the company (lower longevity) and that the error, η_i, in the equation Longevity_i = β₀ + β₁Wage_i + β₂ Education_i + U_i, was uncorrelated with both Wage and Education. How would you sign the bias on your estimate of β₁?

• A) Argue that education is positively correlated with wage and that your estimate of β₁ is an upper bound.
• B) Argue that education is negatively correlated with wage and that your estimate of β₁ is a lower bound.
• C) Argue that education is positively correlated with wage and that your estimate of β₁ is a lower bound.
• D) Argue that education is positively correlated with longevity and that your estimate of β₁ is an upper bound.

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Definitions:

Effective Rate

The actual interest rate of an investment or loan, taking into account the compounding of interest.

Effective Rate

The real rate of interest earned or paid on an investment or loan in a specified period, considering compounding.

Monthly Compounded

Refers to the process of adding interest to the principal sum of a loan or deposit, recalculated on a monthly basis. This is a repeat of Compounded Monthly with a new definition focusing on recalculating interest increase.

Compounded Monthly

Compounded monthly refers to the process where the interest earned on an investment is added to the principal sum each month, causing the principal amount to grow at an increasing rate.