The following regression results are from the first stage regression of Price on income and wholesale costs-which is serving as the instrument for a particular grocery product across different markets: Price_i = 3.2(1.0) + 4.3(0.8)WholesaleCosts_i + 5.5(2.7)Income_i, where standard errors are reported in parenthesis. What conclusion can be drawn about the instrumental variable? A) It's unbiased. B) With a t-stat over 2.5 (4.3/0.8), the instrument is relevant. C) With a t-stat over 2.5 (4.3/0.8), the instrument is exogenous. D) It's under reporting the effect of income on price.

Question

Quizplus · Accepted Answer

A t-stat over 2.5 indicates that the instrument is relevant, meaning that it is strongly related to the endogenous variable (price) and can be used to predict changes in the endogenous variable. The regression results do not provide information on whether the instrument is unbiased or exogenous, so options A and C are incorrect. Option D is also incorrect, as there is no evidence suggesting that the instrument is underreporting the effect of income on price.

The Following Regression Results Are from the First Stage Regression