Choose the best answer and state the reasoning. 8. Suppose you intend to estimat
ID: 3052177 • Letter: C
Question
Choose the best answer and state the reasoning.
8. Suppose you intend to estimate the impact of number of kids in a household on mother’s labor supply (work hours). You estimate Hours = + 1N_boys + 2N_girls + Edu + Age + u, using a sample of married women. N_boys is the number of boys and N_girls is the number of girls in the household. Which of the following is correct?
a) This model suffers from perfect collinearity.
b) The OLS estimator cannot be computed in this situation.
c) When adding the total number of kids as an additional regressor, we would expect that R2 to go up.
d) When adding the total number of kids as an additional regressor, we would expect that OLS does not work.
Explanation / Answer
Answer: Option d) When adding the total number of kids as an additional regressor, we would expect that OLS does not work.
Reason: Number of kids = Number of boys + Number of girls, So rank of independent variable matrix (X) will be less than the required rank to compute OLS estimates.