The Sampling Variance for the Instrumental Variables (IV) Estimator Is

question 19

Multiple Choice

The sampling variance for the instrumental variables (IV) estimator is larger than the variance for the ordinary least square estimators (OLS) because _____.

• A)R² > 1
• B)R² < 0
• C)R² = 1
• D)R² < 1

---

Definitions:

Compensating Variation

An economic concept that quantifies the amount of money needed to compensate someone for a policy change, maintaining their original utility level.

Consumption

The process by which goods and services are utilized by individuals or households to satisfy their needs and wants.

Utility Function

A mathematical representation that assigns numerical values to different bundles of goods, showing the satisfaction or utility those goods generate for a consumer.

Equivalent Variation

An economic measure of the difference in income that a consumer would require to reach the same level of utility before and after a price change.