Consider a simple linear regression model, y = β₀+ β₁x + u, . What does the zero conditional mean assumption imply? A)The expected value of the error term, u , is zero, regardless of what the value of the explanatory variable, x, is. B)The estimated average value of β₁ is zero. C)The expected value of the explained variable, y , is zero, regardless of what the value of the explanatory variable, x , is. D)The estimated average value of β₀ is zero.

Question

Quizplus · Accepted Answer

The zero conditional mean assumption, also known as the exogeneity assumption, states that the expected value of the error term, u, is zero given any value of the explanatory variable, x. This means that there is no systematic relationship between the explanatory variable and the error term. Therefore, option A is correct as it accurately depicts the implication of the zero conditional mean assumption. The other options are incorrect as they do not reflect what the zero conditional mean assumption implies.

Consider a Simple Linear Regression Model, Y = β0+ β1x

Consider a Simple Linear Regression Model, Y = β₀+ β₁x