Question
Consider the following regression function (looking at the relationship between household consumption and household asset holding): consumption=_0+_1 asset+u u=asset^2.e The data comes from a household
Consider the following regression function (looking at the relationship between household consumption and household asset holding): consumption=β_0+β_1 asset+u u=asset^2.e The data comes from a household survey conducted by the National Bureau of Statistics. The sample is a random sample representative of the population. e is a random variable with E(e)=0 and Var(e)=σ_e^2. You can assume that e is independent of the asset.
Clearly explain with proofs (where possible) which of the 5 assumptions of the simple regression model does this model satisfy and which does it fail to satisfy? Based on what you found in a, will β_1 be unbiased? Explain with reasoning.
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Essentials of Econometrics
Authors: Damodar Gujarati, Dawn Porter
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