Consider the following regression model: log(y) = ₀ + ₁x₁ + ₂x₁² + ₃x₃ + u. This model will suffer from functional form misspecification if _____. A) ₀ is omitted from the model B)u is heteroskedastic C)x₁² is omitted from the model D)x₃ is a binary variable

Question

Quizplus · Accepted Answer

The model will suffer from functional form misspecification if the interaction term x₁² is omitted from the model because this term is included in the model specification. If it is omitted, the model will no longer accurately capture the relationship between the independent variables and the dependent variable, leading to functional form misspecification. The other answer choices do not necessarily lead to functional form misspecification.

Consider the Following Regression Model: Log(y) = 0

Consider the Following Regression Model: Log(y) = ₀