Suppose you know the determining function for what drives restaurant sales is of the following form WeeklySales_i = β₀ + β₁WeeklyPromoSpend_i + β₂HolidayWeek_i + U_i. Suppose further that your client told you that she is spending $1,000 per week on weekly promotions, except during the summer where she doubles it. Which statement best describes the role of "summer weeks" in estimating the causal effect of weekly promotion spent using the determining function above? A) If summer weeks are contained in U_i (i.e., they affect Sales), then there is an endogeneity problem. B) If summer weeks leads to more promotion and doesn't affect sales, then there is an endogeneity problem. C) There is no potential endogeneity problem with the determining function above. D) Because weekly promotions are unrelated to whether or not it's a holiday week, there is no endogeneity problem.

Question

Quizplus · Accepted Answer

If summer weeks are included in the error term (U_i), then they will be correlated with the promotional spend variable (β₁). This creates an endogeneity problem as the promotional spend is no longer exogenous and will bias any estimates of the causal effect of weekly promotion spent on sales.

Suppose You Know the Determining Function for What Drives Restaurant