The First-Stage in an Instrumental Variable Approach to Controlling for Endogenous

question 16

Multiple Choice

The first-stage in an instrumental variable approach to controlling for endogenous independent variables is to

• A)regress the endogenous independent variable on the instrument and all of the remaining independent variables and using those estimates to calculate predicted values of the endogenous variable.
• B)regress the endogenous variable on the instrument and all of the remaining independent variables and using those estimates to calculate the residuals.
• C)estimate the original population regression model with the predicted values of the endogenous variable substituted for the observed values of the endogenous variable.
• D)estimate the original population regression model with the predicted residuals included as an independent variable.

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Definitions:

Inelastic

A characteristic of demand whereby a change in price leads to a lesser change in the quantity demanded, indicating low sensitivity to price changes.

Price Ceilings

Government-imposed limits on how high a price can be charged for a product, service, or commodity.

Equilibrium Price

The charge where the amount of merchandise supplied equals the amount consumers are willing to purchase.

Inelastic Demand

A situation where the demand for a product does not significantly change with a change in price.