Question

In ECONOMETRICS,

What does assumption SLR.4 say? What does it mean in the context of the following regression?

salary = β0 + β1 x educ + u

Answer 1

SLR 4 : The conditional Expectation of u conditional on X is always 0.

i.e - E(u|x) = 0

and

SLR4': Expected value of u is zero

i.e - E(u) = 0

in the given example the assumpiton says that,

salary = β0 + β1 x educ + u

E(u) = 0 and E(u|x) = 0 which implies that the u is not dependent on x and not related to x