(3) The following simple model is used to determine the annual savings of an individual on

the basis of his annual income and education

savings = Bo + dohsGrad + ₁inc + u,

where the variable hsGrad takes value of 1 if the person is a high school graduate and

the variable inc measures the income of individual.

Refer to the model above. The inclusion of another binary independent variable in

this model that takes a value of 1 if a person is not a high school graduate will give rise

to the problem of

(a) omitted variable bias.

(b) self-selection.

(c) perfect collinearity

(d) heteroskedastcity.