Question

The following table contains data for 6 people employed in Atlanta. Information is available on each person's wage (variable wage), along with information on the education level of each person (variable educ). Person educ Wage (tenth of thousands) 16 10 ho rolationshin between wage and education

Answer 1

Le y = Wage (Dependent Voriable) XEduc (ndependent Vaneble) (x-x {y-5) (x-) (y-7) y-7 x-X X Y Person 25 25 -5 - 25 5T 16 10 0 6 -15 25 C 5 -5 20 25 81 -45 I5 5 - 15 - 3 २5 8 5 a 5 25 -a5 57 -5 Zy X60 Mean Value of Dependent Vania ble 7 = 2Y 66 6 Mean Velue Tndependent Veiable = EX 60 (x-) (y- (x-X)y-7 b. Correlation coetficient (r)= 16E 128.84 0.85 o Lr

Pape 2 Anyaliveconeltien coeffeient ef - 0.85 indicates megative rlationship betoeen ie. education yeag up thattheexists a tduc &wge ange coill fall C. (x-Y- 2(x-X)2 00 - I.) AnA 11--)x10 I 22 A

d.

The estimates are given in part a. have the Causal Effect of Education on the Wage earnings. However, education seems to be correlated with many other variables which in turn make the estimation inappropriate to interpret. For example, educ may be correlated to the smoking of students or their midterm marks etc. Because of these INSTRUMENTAL VARIABLES, we cannot give a causal interpretation to the estimates. Also, the value of r is negative which is not realistic as the Education increases, the earnings should also go up