Question 1 and 2

QUESTION 1 Suppose a manufacturing firm has two factories (Factory 1 and Factory 2), and a single production process (Process A) that is used in both factories. A new process (Process B) is developed that potentially reduces production costs. To test whether Process B is less costly than Process A, an experiment is designed where: 1. Within each Factory, products are assigned randomly to Process A or Process B. 2. Production costs for each product are recorded. Note that resources (i.e. materials, workers, equipment) are not reassigned across factories. Let Yi be the cost of producing product i, let X; be 1 if Process B is used to produce i and 0 if Process A is used, and let Wi be 1 if product i is produced in Factory 1 and 0 if it is produced in Factory 2. In a regression of Yi on X, it is advisable to: a. Exclude Wi as products are randomly assigned and including Wi would increase standard errors O b. Exclude Wj as it is uncorrelated with Xi O C. Include Wi as E(uj | Xi) # 0, but E(X; | W;) = 0 O d. Include Wj as E(uj | X;) # 0, but E(uj | Xi, Wi) = E(u; | W;) QUESTION 2 Continue to use the example from Question 1. Suppose each product is randomly assigned to a process by a computer program, but some products get reassigned on the factory floor (for practical reasons). Let Zi denote the original assignment and X; the actual process used to produce i. In a regression of Yi on X; and Wi, OLS is: O a. Potentially biased because Wi should not be included O b. Potentially biased, but an IV regression using Zi as an instrument can be used to obtain a consistent estimator O C. Unbiased because the products were randomly assigned in the beginning O d. Unbiased as long as Z; is also included as a control variable