Which of the Following INCORRECTLY Addresses the Problem of "Ability

question 12

Multiple Choice

Which of the following INCORRECTLY addresses the problem of "ability bias?"

• A) In the earning function, lnY = a + bS + e, where log wages depend only on the level of schooling, S, and unobserved talent, e. The OLS estimate of the return to schooling b is biased, because unobserved talent, e, is correlated with schooling.
• B) The problem of "ability bias" can be addressed by 'natural experiments" technology.
• C) The estimated coefficient may understate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.
• D) Recent empirical studies have found that the problem of "ability bias" is exaggerated.
• E) The estimated coefficient may overstate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.

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Definitions:

Principal

The original sum of money borrowed in a loan or the initial amount of investment before any earnings or interest is added.

Interest

The charge for borrowing money or the compensation paid to a lender by a borrower for the use of borrowed funds.

Total Assets

The sum of all resources owned by a company, including cash, inventory, property, and equipment, reflected on the balance sheet.

Depreciation

A method of allocating the cost of a tangible asset over its useful life.