Consider the linear probability model Yi = b0 + b1Xi + ui, w
Question and Solution
Consider the linear probability model Yi = b0 + b1Xi + ui, where Pr(Yi = 1Xi ) = b0 + b1Xi. a. Show that E(ui Xi ) = 0
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Consider the linear probability model Yi = b0 + b1Xi + ui, where Pr(Yi = 1Xi ) = b0 + b1Xi. a. Show that E(ui Xi ) = 0. b. Show that var(ui Xi ) = (b0 + b1Xi )[1 - (b0 + b1Xi )]. [Hint: Review Equation (2.7).] c. Is ui heteroskedastic? Explain. d. (Requires Section 11.3) Derive the likelihood function.
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