In the following determining function, Earnings_i = α₀ + α₁Education_i + U_i, what might be a factor contained in U_i? A) Predictions of earnings B) Innate ability, which might be correlated with education and earnings C) Proximity to a 4-year college, which is known to not impact earnings D) Heteroscedasticity

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Quizplus · Accepted Answer

U_i represents the error term in the earnings determining function, which could include factors not explicitly accounted for in the model, such as innate ability. This term might capture the variation in earnings not explained by the model's included variables (like education), and innate ability is a plausible factor that could influence earnings but is not directly measured by the variables in the model.

In the Following Determining Function, Earningsi = α0 + α1Educationi

In the Following Determining Function, Earnings_i = α₀ + α₁Education_i