Mathematics

Maia Norton

9 August, 12:35

Suppose you estimated the model y = B1 + B2X2 + B3X3 + e and discover that all the pa - rameter estimates are statistically significant (at the a = 5% level), and that all the other diagnostics are consistent with MR1-MR5. However, you forgot to include the variable 24, and therefore, decide to estimate the model y = B1 + B2x2 + B3X3 + B4X4 + e but discover that all the variances of the estimates of the parameters have increased considerably. Which of the following statements best describes a plausible reason for this situation.

(a) The variable 24 is likely to be an irrelevant variable.

(b) The variable x4 is likely to be a relevant omitted variable.

(c) The original model (the one without x4) was most likely misspecified.

(d) The correlations between x4 and the other independent variables are expected to be very low.