Consider the regression of Sales_i = α₀ + α₁Price_i + α₂Promo_i + α₃Weekend_i + U_i, where Promo_i and Weekend_i are binary variables for if the particular observation was on promo (1 if promo, 0 otherwise), or comes from a weekend day (1 if weekend day, 0 otherwise). A member of your team informs you that all the promotions run for the products in your population were run on weekends. What identification challenge might you worry about? What identification challenge might you worry about?

Question

Quizplus · Accepted Answer

C) Perfect multicollinearity occurs when one predictor variable in a multiple regression model can be exactly linearly predicted from the others with a substantial degree of accuracy. In this case, since all promotions are run on weekends, the Promo and Weekend variables will have the exact same values for all observations (both will be 1 for weekends and 0 otherwise), leading to a situation where one can be perfectly predicted from the other.

Consider the Regression of Salesi = α0 + α1Pricei

Consider the Regression of Sales_i = α₀ + α₁Price_i