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In a study relating consumption expenditure (Y) on income (X2) and wealth (X3) based on 10...

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Basic Math

In a study relating consumption expenditure (Y) on income (X2)and wealth (X3) based on 10 observations , the following equationwas obtained

Yhat = 24.337 + 0.08764X2 - 0.0349X3

     SE  (6.2801)    (0.31438)   (0.0301)

       t   (3.875)     (2.7726)    (-1.1595)               

i) In your opinion, what type of problem takes in this result?Explain it

ii)   What are the practical consequences of thisproblem?

iii) What are the theoretical of this problem

iv) How to detect this problem?

v)In your judgement, what to do to remove this problem?

vi) How do we remedy this problem

Answer & Explanation Solved by verified expert
4.2 Ratings (540 Votes)
i The problem is a Multicollinearity problemExplanation Multicollinearity is a state ofvery high intercorrelations or interassociation among theindependent variables It is therefore a type of disturbance inthe data and if present in the data the statistical inferencesmade about the data may not be reliable Here the Income and Wealthare highly correlated Hence the problem has been foundii Multicollinearity can result in several practicalproblems These problems are as followsMulticollinearity is a data problem It does not have anyrelation with the regression outcome BUT the outcome which we willget will not be reliableThe standard error will be more than expected hence theestimates can not be used for forecast purpose for the differentdatasetsiii Theoretical ProblemThe partial regression    See Answer
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