A microeconomist wants to determine how corporate sales are influenced by capital and wage spending by companies. She proceeds to randomly select 26 large corporations and record information in millions of dollars. A statistical analyst discovers that capital spending by corporations has a significant inverse relationship with wage spending. What should the microeconomist who developed this multiple regression model be particularly concerned with?
A) randomness of error terms
B) collinearity
C) normality of residuals
D) missing observations

Question

Quizplus · Accepted Answer

The significant inverse relationship between capital spending and wage spending in the multiple regression model suggests that there may be collinearity between these predictor variables. Collinearity can lead to unreliable coefficient estimates and difficulty in interpreting the effects of each predictor variable. The microeconomist should consider whether one of these variables should be removed from the model or if additional data should be gathered to better understand their relationship. While randomness of error terms, normality of residuals, and missing observations are also important considerations in regression analysis, they do not specifically relate to the issue of collinearity in this case.

A Microeconomist Wants to Determine How Corporate Sales Are Influenced