Question
. Suppose that Wendy has high ability and goes to college and the William has low ability and does not. A table describing their observed
. Suppose that Wendy has high ability and goes to college and the William has low ability and does not. A table describing their "observed" earnings is produced below. Wendy William High School - $20,000 College $50,000 - Ability High Low a. Start by using Wendy's observed earnings as a counterfactual for what William would have earned had he gone to college and William's observed earnings as a counterfactual for what Wendy would have earned had she not gone to college. Produce a table giving the observed outcomes and the counterfactuals you used. b. Use your table to provide an estimate of the average treatment effect on the treated and the average treatment effect on the untreated. Do you think that these estimates give the causal effect of college on earnings? Why or why not? c. Suppose now that I am able to come up with the true counterfactuals for this problem, as shown in italics in the table below. Wendy William High School $30,000 $20,000 College $50,000 $30,000 Ability High Low How do these counterfactuals compare to the counterfactuals obtained by using the observed earnings of the other person? Do these new counterfactuals make sense to you? Why or why not? d. Finally, use the data in the second table to give me dollar values of (1) the observed earnings difference; (2) the average treatment effect on the treated; and (3) selection bias.
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