Consider the multiple regression model with two regressors X1 and X2,where both variables are determinants of the dependent variable.When omitting X2 from the regression,then there will be omitted variable bias for
A)if X1 and X2 are correlated
B)always
C)if X2 is measured in percentages
D)if X2 is a dummy variable

Question

Consider the multiple regression model with two regressors X1 and X2,where both variables are determinants of the dependent variable.When omitting X2 from the regression,then there will be omitted variable bias for 
A)if X1 and X2 are correlated 
B)always 
C)if X2 is measured in percentages 
D)if X2 is a dummy variable

Quizplus · Accepted Answer

When X1 and X2 are correlated, omitting X2 from the regression will introduce bias because the effect of X1 on the dependent variable cannot be properly estimated without controlling for the effect of X2. This is because X1 and X2 are jointly determining the dependent variable, and the correlation between the two makes it impossible to separate their individual effects without including them both in the model.

Consider the Multiple Regression Model with Two Regressors X1 and X2,where