In the case of the simple regression model Yi = β0 + β1Xi + ui,i = 1,…,n,when X and u are correlated,then
A)the OLS estimator is biased in small samples only.
B)OLS and TSLS produce the same estimate.
C)X is exogenous.
D)the OLS estimator is inconsistent.

Question

Quizplus · Accepted Answer

When X and u are correlated, the OLS estimator becomes biased and inconsistent. Therefore, option D is the correct choice. Options A and B are incorrect because the bias in the OLS estimator is not limited to small samples and TSLS produces a more efficient and consistent estimate. Option C is also incorrect because X cannot be considered exogenous if it is correlated with the error term.

In the Case of the Simple Regression Model Yi =