The least squares method requires that the variance of the error variable ε is a constant no matter what the value of x is.When this requirement is violated,the condition is called:
A)heteroscedasticity.
B)homoscedasticity.
C)influential observation.
D)non-independence of ε.

Question

The least squares method requires that the variance  of the error variable ε is a constant no matter what the value of x is.When this requirement is violated,the condition is called:
A)heteroscedasticity. 
B)homoscedasticity. 
C)influential observation. 
D)non-independence of ε.

Quizplus · Accepted Answer

Heteroscedasticity occurs when the variance of the error term is not constant across all values of X. This violates the assumption of the least squares method that the variance of ε is constant, and can result in biased standard errors and coefficients, and inflated or deflated significance. Therefore, A is the correct choice. The other options, homoscedasticity, influential observation, and non-independence of ε, do not adequately capture this violation of assumptions.

The Least Squares Method Requires That the Variance of the Error