Assume you believe the demand for a good can be determined by the model:demand i =β 0 +β 1 po i +β 2 pc i +β 3 ps i +ϵ i where demandi measures demand for the good in units, poi measures price in $ for the good, pci measures price in $ for a complement good, psi measures price in $ for a secondary complement good. Now assume the true model should have included income where income is income for individual i. Assume the good is normal (increase in income will result in increased demand) and income has no correlation with pc. The bias on β 2 will be:AnegativeBzeroCimpossible to determineDpositiveSUBMIT ANSWER
Question
Assume you believe the demand for a good can be determined by the model:demand i =β 0 +β 1 po i +β 2 pc i +β 3 ps i +ϵ i where demandi measures demand for the good in units, poi measures price in for a complement good, psi measures price in $ for a secondary complement good. Now assume the true model should have included income where income is income for individual i. Assume the good is normal (increase in income will result in increased demand) and income has no correlation with pc. The bias on β 2 will be:AnegativeBzeroCimpossible to determineDpositiveSUBMIT ANSWER
Solution
The bias on β2 will be impossible to determine (C). This is because the bias on β2 depends on the correlation between the omitted variable (income) and the included variable (price of the complement good, pc). Since it is stated that income has no correlation with pc, we cannot determine the direction of the bias without additional information.
Similar Questions
Assume you believe the demand for a good can be determined by the model:demand i =β 0 +β 1 po i +β 2 pc i +β 3 ps i +ϵ i where demandi measures demand for the good in units, poi measures price in $ for the good, pci measures price in $ for a complement good, psi measures price in $ for a secondary complement good. A researcher gathers some results and feels they should drop variables to solve multicollinearity in order to solve issues in their model. Based only on the residuals you believe the most likely issue is:
How does an increase in income affect the demand for an inferior good? Demand increases. Demand decreases. Demand remains the same. The effect on demand cannot be determined.
18. How does a change in income affect demand for inferior goods?
If a good is normal, then an increase in income will result in A. a downward movement along the demand curve B. a decrease in the demand for the good C. an increase in the demand for the good D. an upward movement along the demand curveReset Selection
hat kind of relationship exists between income and demand in case of normal goods ?There is no impact of income on demand Sometime there is a direct and sometimes an inverse relationship There is a direct relationship There is an inverse relationship
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