Introductory Econometrics 4th Edition by Jeffrey Wooldridge

تمرين 6

Consider a simple model to estimate the effect of personal computer (PC) ownership on college grade point average for graduating seniors at a large public university:
GPA = 0 + 1 PC + u,
where PC is a binary variable indicating PC ownership.
(i) Why might PC ownership be correlated with u
(ii) Explain why PC is likely to be related to parents' annual income. Does this mean parental income is a good IV for PC Why or why not
(iii) Suppose that, four years ago, the university gave grants to buy computers to roughly one-half of the incoming students, and the students who received grants were randomly chosen. Carefully explain how you would use this information to construct an instrumental variable for PC.