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With these seven assumptions, we can determine the precise statistical properties
of the slope estimator b. And in particular we can find expressions for its mean
value and its variance. We will start with the mean of b, and we will see how far
off b is from beta. The crucial idea is to express b in terms of the random variables
epsilon, because the assumptions imply the statistical properties of these
epsilons.
Because other unobserved factors may affect wage such as the personal
characteristics and the experience of the employee, we add an error term to
represent the combined effect of such other factors.
We generalize the above setup now to the case where the dependent variable y is
explained in terms of k factors. We assume that the model contains a constant
term which is denoted by beta one. For the notation, it's convenient to define the
first x variable as this constant term, which has value one for all observations.
The total effect is the sum of these positive and negative effects, and it depends
on the size of these effects whether the total wage effect is positive or negative.
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