Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 2

Suppose you collect data from a survey on wages, education, experience, and gender. In addition, you ask for information about marijuana usage. The original question is: “On how many separate occasions last month did you smoke marijuana?”

(i) Write an equation that would allow you to estimate the effects of marijuana usage on wage, while controlling for other factors. You should be able to make statements such as, “Smoking marijuana five more times per month is estimated to change wage by x%.”

(ii) Write a model that would allow you to test whether drug usage has different effects on wages for men and women. How would you test that there are no differences in the effects of drug usage for men and women?

(iii) Suppose you think it is better to measure marijuana usage by putting people into one of four categories: nonuser, light user (1 to 5 times per month), moderate user (6 to 10 times per month), and heavy user (more than 10 times per month). Now, write a model that allows you to estimate the effects of marijuana usage on wage.

(iv) Using the model in part (iii), explain in detail how to test the null hypothesis that marijuana usage has no effect on wage. Be very specific and include a careful listing of degrees of freedom.

(v) What are some potential problems with drawing causal inference using the survey data that you collected?

Step 1 of 5

(i)

Consider the model that relates wages to education, experience, and gender and marijuana usage given by:

Where,

Wage-rate

The number of marijuana used by the employee per month

The education level of the employee

The experience level of the employee

The binary variable which is equal to 1 for Male

From this wage-equation, one could infer that if increases by 1 time per month, the wage would change by, other factors being controlled for

When the increases by 5 more times per month, the wage would change by .

Here .