Consider the Following Simple Regression Model Y=β₀ + β₁x₁

question 4

Multiple Choice

Consider the following simple regression model y=β₀ + β₁x₁ + u.The variable z is a poor instrument for x if _____.

• A)there is a high correlation between z and x
• B)there is a low correlation between z and x
• C)there is a high correlation between z and u
• D)there is a low correlation between z and u

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Definitions:

Risk-loving

Refers to a preference for risk when making choices under uncertainty, where a greater level of risk is associated with the potential for higher rewards.

Negative Expected Value

A statistical condition where the anticipated result of an investment is less than the initial cost.

Moral Hazard

The risk that one party to a transaction has not entered into the contract in good faith or has an incentive to take unusual risks because the costs are not borne by that party.

Flat Salary

A flat salary is a fixed amount of pay received by an employee, regardless of the number of hours worked or the quantity of output.