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Question1
1. The individual's ability/intelligence/hard work, among other things, is one of the variables determining salaries. This crucial variable is not included in the above equation, hence it is included in the incorrect term. However, ability is positively connected to education, i.e., better ability workers or hard workers are more likely to have more education, so the error term is related to one of the independent variables, posing an endogeneity problem. If basic OLS is employed to estimate the aforementioned regression coefficients, this will result in a skewed estimate of the coefficient.
2. Because of the issue of endogeneity, instrumental variable regression is useful when some...