Please answer parts a), b) and c)

1. (5 points) Consider the following model to estimate the effects of several variables, including cigarette smoking, on the weight of newborns: where male is a binary indicator equal to one if the child is male; parity is the birth order of the child; faminc is family income; and packs is the average number of packs of cigarettes smoked We are interested in estimating this equation using per day by the mother dur data from the United States. ing pregnancy. (a) Why might you expect packs to be correlated with the error term u? Explain. (b) Suppose you have data on average cigarette price in each woman's state of residence. Discuss whether this information is likely to satisfy the properties of a good instrumental variable for packs (c) Use the data in bwght.dta to estimate equation 1. First use OLS. Then, use 2SLS, where cigprice is an instrument for packs. Discuss any important differences between the OLS (d) Test whether packs is exogenous in equation 1 (under the maintained assumption of in- (e) Estimate the first stage regression for packs. What do you conclude about identification of and 2SLS estimates. strument validity). equation 1 using cigprice as an instrument for packs? What bearing does this conclusion have on your answers from parts (c) and (d)? (f) Can you test overidentifying restrictions for the 2SLS model you estimated for question (c)? Explain