You should be estimating the following model (assume this is the true
model)
Yi = 2.5 + 1.5Xi + 0.2Zi + ei
where X is education, Z is the person’s age and Y is wage per hour, but
you choose to estimate
Yi = 2.5 + 3.5Xi + ei
(a) What problem will you run into? Describe its consequences on various
aspects of the model.
(b) Show theoretically how you could determine how important this
problem is.
(c) Calculate the value of the coefficients you used for your explanation
in (b) and the size of the problem. There is a way to find numerical values
for all of them given the information provided in this question.