Question

1. For each of the following, explain whether (a) the coefficients are biased or unbiased, and (b) the standard errors (t-statistics) are valid: (a) (5 points) Heteroskedasticity (b) (5 points) A sample correlation coefficient of 0.95 between two independent vari- ables. (c) (5 points) Omitting an important explanatory variable.

Answer 1

1 a. Hetroskedasticity does not cause ordinary least squares coefficient estimates to be biased although it can cause ordinary least squares estimates of the variance of the coefficients to be biased.

1 b. The correlation coefficient is measured on a scale that varies from +1 through 0 to -1.Complete correlation between to variables is expressed either by =1 or -1.When one variable is increases as the other increases the correlation is positive,when one decreases as the other increases it is negative.

1 b. In statistics omitted variable bias occurs when a statistical model leaves out one or more relevant variable.The bias results in the model attributing the effect of the missing variables to the estimated affects of the included variables.