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4) (4 points) Measurement error can be a problem Why is measurement

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4) (4 points) Measurement error can be a problem. Why is
measurement error of an independent variable worse than
measurement error of a dependent variable? How is
measurement error for a dependent variable undesirable?
Solution
Classical Measurement Error We will start with the
simplest regression models with one independent variable.
For expositional ease we also assume that both the
dependent and the explanatory variable have mean zero.
Suppose we wish to estimate the population relationship y
= x + (1) Unfortunately, we only have data on xe = x + u
(2) ye = y + v (3) i.e. our observed variables are measured
with an additive error. Let

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4) (4 points) Measurement error can be a problem. Why is measurement error of an independent variable worse than measurement error of a dependent variable? How is measurement error for a dependent variable undesirable? Solution Classical Measurement Error We will start with the simplest regression ...
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