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 inclusion of a binary variable for both educated and uneducated individuals would lead to the dummy variable trap, where one of the variables would be a linear combination of the others. This can result in biased coefficient estimates and incorrect statistical inferences. The inclusion of another dummy variable in this model would introduce perfect collinearity and lead to a dummy variable trap.

The Following Simple Model Is Used to Determine the Annual