6 14For bungee to be a valid proxy for riskaverse, itmust beCorrelated with price and uCorrelated with riskaverse and priceshould contain additional information onriskaverseCorrelated with price and riskaverseCorrelated with riskaver se and priceshould contain no additional information onriskaverse15Which of the following statements is correct if there israndom measurement error in the dependent variabley?OLS estimates will be biasedHypothesis tests will be invalidOLS estimates will be inconsistentStandard errors will be larger Proxy VariablesThe following equation relates a binary indicator forhaving health insurance coverage to price and a binaryindicator for being averse to risk:insured =Bo + Bıprice + Bariskaverse + uSuppose that data on riskaverse is not available butdata on bungee is available. The variable bungee is one ifthe person has done bungee jumping at least once in thepast 6 months and zero otherwise.13For bungee to be a valid proxy for riskaverse, itmust beUncorrelated with the error termUncorrelated with B2Uncorrelated with risk averseUncorrelated with price

Note: We will answer the first question as the exact one was not specified. Please resubmit the new…

Answered: 13 For bungee to be a valid proxy for…

13 For bungee to be a valid proxy for riskaverse, it must be Uncorrelated with the error term Uncorrelated with B2 Uncorrelated with risk averse Uncorrelated with price

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.6P

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Question

14
For bungee to be a valid proxy for riskaverse, it
must be
Correlated with price and u
Correlated with riskaverse and price
should contain additional information on
riskaverse
Correlated with price and riskaverse
Correlated with riskaver se and price
should contain no additional information on
riskaverse
15
Which of the following statements is correct if there is
random measurement error in the dependent variable
y?
OLS estimates will be biased
Hypothesis tests will be invalid
OLS estimates will be inconsistent
Standard errors will be larger

Proxy Variables
The following equation relates a binary indicator for
having health insurance coverage to price and a binary
indicator for being averse to risk:
insured =
Bo + Bıprice + Bariskaverse + u
Suppose that data on riskaverse is not available but
data on bungee is available. The variable bungee is one if
the person has done bungee jumping at least once in the
past 6 months and zero otherwise.
13
For bungee to be a valid proxy for riskaverse, it
must be
Uncorrelated with the error term
Uncorrelated with B2
Uncorrelated with risk averse
Uncorrelated with price

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