Suppose you are estimating the following model: Y_i = β₀ + β₁X_i + U_i. You believe the variance of the unobserved factors (U) varies with X. If this is true, what is the consequence? A) Your estimate for β₁ will be biased. B) Your estimate of β₀ will be biased. C) Your estimate for β₀ and β₁ will be biased. D) None of the above answers is correct

Question

Quizplus · Accepted Answer

If the variance of the unobserved factors (U) varies with X, it affects the efficiency of the estimates but does not necessarily bias the estimates of β0 or β1. The key issue here is heteroskedasticity, which affects the standard errors of the estimates, making them inefficient, but not biased.

Suppose You Are Estimating the Following Model: Yi = β0

Suppose You Are Estimating the Following Model: Y_i = β₀