Question

aplot may d Consider figure I below Illustrating the yearly rome (x) and consumption (71) data of N Canadians where person i = l... N. In class e sarl that such a indrcate a violation of one of the OLS assumptions In your oplorun on the basis of this scatter plot which of the OL assumptions is most likely to be volated here. How does the violation affect statisitical properties of the OLS estimators Consumption + 2 0 inome X FIVE STAR

Answer 1

Brief Answer

The major possible assumption which is violated from this scatter diagram is the assumption of no misspecification errors. It leads to the incorrect judgement of the Autocorrelation problem.

Explanation

In the scatter diagram there is no possible relationship between the value of the income and the consumption. It seems that the number of data points which shows the positive relationship between the income and the consumption is the same as that of the data points which shows no such kind of relationship between the income and the consumption. Hence, if the proper relationship cannot find out between them it would lead to misspecification error.

If there is a misspecification error then it would give incorrect Durbin-Watson test statistic which leads to misleading inference regarding the presence of Autocorrelation in the model.

Durbin-Watson test statistic (d) = ∑ (ut(cap)-ut-1(cap))^2/Σut(cap)^2