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) collinearity
B) randomness of error terms
C) normality of residuals
D) missing observations

Question

Quizplus · Accepted Answer

The microeconomist should be particularly concerned with collinearity, which refers to the presence of high correlation among independent variables in a regression model. In this case, the inverse relationship between capital spending and wage spending suggests that they may be highly correlated, which can cause problems in estimating the individual effects of each variable on the dependent variable (corporate sales). Collinearity can also lead to instability in regression coefficients and reduced accuracy in predictions.

A Microeconomist Wants to Determine How Corporate Sales Are Influenced