What do the findings suggest about the relation between years of schooling and wages?

Please answer all questions separately
Imagine a population where there is only one level of ability. The Department of Economics of
University A is asked to estimate the returns to schooling for this specific population. The research team
gathers data from all levels of educational qualifications and estimates the following specification:
log(𝑀𝑀) = 𝑏𝑏𝑏𝑏 + π‘‚π‘‚π‘‚π‘‚β„Žπ‘’π‘’π‘’π‘’ 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
Where w is the worker’s wage rate, s is the number of years of schooling and b captures the returns to
schooling. The researchers find that the returns to schooling are equal to 𝑏𝑏 = 0.07 .
a. What do the findings suggest about the relation between years of schooling and wages?
Interpret the result. Do the findings agree with economic theory? [30%]
b. University B criticizes the methodology used by University A, claiming that important
determinants are omitted from the main specification. They suggest that the β€œMincer equation”
is used instead. Explain what the β€œMincer equation” is and why it might be a more appropriate
approach in this framework. [25%]
c. Imagine that the initial population has two levels of ability instead of one; High and Low.
Ability is unobservable. University A uses the Mincer equation to estimate the returns to
schooling. University B claims that the estimate is biased. What kind of biases does estimating
this equation in a population with two different ability levels cause? Is the final estimate likely
to be overestimated or underestimated due to those biases, and why? [25%]
d. University A hires you to find a way to properly estimate the returns to schooling. Suggest a
method you would use to correct the biases, and describe it. [20%]
General instructions about the assignment:
Presentation: The file submitted should be in word or pdf format.
Length: Between 3 and 5 A4 pages (Times New Roman, 11 or similar). Use the layout on this document
as a reference point.
Marks allocation: as described

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