If a regression is in the incorrect functional form, explain why it is unlikely that E[u_i_│X_i] = 0.

Question

Quizplus · Accepted Answer

The Answer is Here we have applied a straight line when an alternate functional form is appropriate. Notice E[

U _ { i }

|X_i] ≠ 0. When the value of X (PMILK) is low, u_i is likely to be positive, not 0. Similarly, when the value of X (PMILK) > 2.5, u_i is likely to be positive. When 1.0 < PMILK < 2.5, u_i is likely to be negative. Thus, E[u_i] depends on Xi and is not expected to equal to zero.

If a Regression Is in the Incorrect Functional Form, Explain