Suppose that X1 is measured with error.
Yi = 0 + 1X1i + i
Xi = X*1i + i
In which of the following cases will the bias be most severe?
A) The variance of the independent variable ( x*) is much smaller than the variance of the error measurement error ( ) .
B) The variance of the independent variable ( x*) is much larger than the variance of the error measurement error ( ) .
C) The variance of the error measurement error ( ) is zero.
D) There will be no bias.
Correct Answer:
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