Problem Set 2 Problem 1 A. Explain in words, what it means for the OLS estimator to be unbiased.

- For the OLS estimator to be unbiased it must be in the BLUE (Best Linear Unbiased Estimator) form, where the OLS estimator follows the 4 assumptions: Assumption 1: Requires that X is correlated with Y/ linear in parameters. Assumption 2: The random sampling assumption should be representative of the underlying population parameters. Assumption 3: The sample outcomes on X, namely {x, =1,n} are not all the same value. Assumption 4: The zero conditional mean. B. If the OLS estimator is unbiased for the true population parameter, is the OLS estimator necessarily equal to the population parameter? Explain. - Unbiasedness does not mean that the estimate we get with any particular sample is equal to population parameter, or even very close to it. We only used sample data from the population to the OLS estimator C. Prove that OLS is unbiased under the classical model. Explain each step of the proof and cite each necessary assumption. Problem 2 A. Derive the expression for the variance of the OLS estimator in the classical model. Explain each step and cite each necessary assumption. B. Explain the intuitive relationship between the variance of the error term and the variance of the OLS estimator. - The variance of the OLS estimator depends on the error variance, and the total variation. The larger the error variance the larger the OLS estimator variance. More variation in the observables affecting Y makes it more difficult to precisely estimate 1. On the other hand, more variability in the independent variable is preferred: as the variability in the x increases and the variance of the OLS estimator decreases. Problem 5 1. In a study relating college grade point average to the time spent in various activities, you distribute a survey to several students. The students are asked how many hours they spend each week in four activities: studying, sleeping, working and leisure. Any activity is put into one of the four categories, so that from each student, the sum of hours in the four activities must be 168. i. In the model GPA=o+1study+2sleep+3work+leisure+u, Does it make sense to hold sleep, work and leisure, while changing study?

-It makes sense to hold the other factors constant (sleep, work, leisure) while changing the other variable (study) because in doing this, we can identify the level of causality of the variable study to the dependent variable GPA. ii. Explain why this model violates Assumption MRL.3 -There is a multicollinearity in the model, where the independent variables directly affects each other or they are highly correlated such that the study variable is correlated with sleep variable, the more ones spent in studying the lesser the time ones spend for sleeping, and it is also true with the other independent variables, so it is clear that in this model we cannot determined the effect of one independent variable to the dependent variable.

D. Suppose that the true population regression (data generating process ) is given by Problem 2 A. Derive the expression for