The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education. Savings = The variable 'Edu' takes a value of 1 if the person is educated and the variable 'Inc' measures the income of the individual.

Refer to the model above. The inclusion of another binary variable in this model that takes a value of 1 if a person is uneducated, will give rise to the problem of _____.
A)omitted variable bias
B)self-selection
C)dummy variable trap
D)heteroskedastcity

Question

The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education. Savings =  The variable 'Edu' takes a value of 1 if the person is educated and the variable 'Inc' measures the income of the individual.
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Refer to the model above. The inclusion of another binary variable in this model that takes a value of 1 if a person is uneducated, will give rise to the problem of _____.
A)omitted variable bias 
B)self-selection 
C)dummy variable trap 
D)heteroskedastcity

Quizplus · Accepted Answer

The Answer is C

The Following Simple Model Is Used to Determine the Annual