7. (7 points) Suppose that you have the following linear regression model: Y,B1

Question

7. (7 points) Suppose that you have the following linear regression model: Y,B1 2X2i + 3X3i + 4X4i-S5X5i + ui. Your estimates b4 and b5 turn out to be imprecise and you cannot reject the null hypothesis that they are different from zero. You suspect that perhaps multicollinearity is a problem since both variables should be important variables. Suggest a procedure that can give you more information on whether multicollinearity is a problem for X4i and Xsi and explain why it would give you more information.

Explanation / Answer

You should check for the variance inflation factor. IF VIF is <10. Then there is no multicollinearity otherwise there is multicollinearity.

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