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 microeconomist should be concerned with collinearity, as the significant inverse relationship between capital spending and wage spending suggests that these two independent variables may be highly correlated, which can affect the reliability of the regression coefficients.

A Microeconomist Wants to Determine How Corporate Sales Are Influenced