Question

In: Economics

How do we decide that variables to include on the right hand side? List 4 important

How do we decide that variables to include on the right hand side? List 4 important

Solutions

Expert Solution

1) Junk variables may be statistically significant due to random chance. Suppose your acceptable
significance level is .05. If you introduce ten junk variables, there is about a 40 percent chance that at least one will be significant, just due to random chance.
If you don’t know what is junk and what is not, you will often find yourself claiming that junk variables really matter. If someone tries to reproduce your findings using different data, they will usually be unable to reproduce your junk result. Your shoddy methods are then exposed for all to see.

2) A junk variable that is correlated with another valid predictor may, by sheer luck, also have a
strong correlation with the LHS variable. This could make the valid predictor appear
insignificant, and you may toss it out of the model. (This is related to multicollinearity, which I
will discuss later in this note.) The bigger the kitchen sink, the better the chance that this
happens. The bottom line: when you add junk variables, “stuff” happens. “Stuff” is not good.
3) Adding some variables to your model can affect how you interpret the coefficients on others.
This occurs when one RHS variable is, itself, a function of another. This is not as serious a
problem as (1) and (2), but does require you to be careful when you describe your findings. The
next section shows you how the interpretation of one variable can change as you add others.


Related Solutions

What is a dummy variable? If we use one on the right-hand side of the equation...
What is a dummy variable? If we use one on the right-hand side of the equation in a multivariate analysis, what are the implications for interpreting the constant?  What is multicollinearity? How do we know if we have it in our models? How do we correct for it if we do?  What is hetereskedasticity? Should we really be concerned about it? Why or why not?
Determine variables of interest, control variables, and explain how to decide which variables to include in...
Determine variables of interest, control variables, and explain how to decide which variables to include in a regression model
Rearrange each of the following inequalities so that zero is on the right-hand side. a. p1<...
Rearrange each of the following inequalities so that zero is on the right-hand side. a. p1< p2 b. p1> p2 c. p1/= p2 for C. the line goes through the equals sign. Suppose the Acme Drug Company develops a new drug, designed to prevent colds. The company states that the drug is equally effective for men and women. To test this claim, they choose a random sample of 100 women and 100 men. At the end of the study, 38%...
a) Change the right-hand-side value of one of the constraints. Be sure that, the updated tableau...
a) Change the right-hand-side value of one of the constraints. Be sure that, the updated tableau is infeasible, and you are applying Dual Simplex Method. (Find a change that will make the new tableau infeasible.) b) Change the objective function coefficient of one of the decision variables. Be sure that, the updated tableau is non-optimal, and you are applying Simplex Method. (Find a change that will make the new tableau non-optimal.) c) Find the validity range for one of the...
Please list and explain the 4 key supply side growth factors we discussed, and discuss the...
Please list and explain the 4 key supply side growth factors we discussed, and discuss the viability (do-ability) of each in terms of getting our economy growing again, given that today our economy is not growing. a. The slides should provide you with what you need here. b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will...
1. List the 4 phases of the business cycle. Which phase are we in right now?...
1. List the 4 phases of the business cycle. Which phase are we in right now? What evidence do you have to support your theory? Describe who is in the labor force. Who is not included in the labor force. In the past 20 years or so, the baby boom generation has been retiring. It is estimated that 10,000 turn 65 years old every day in the US. In addition, record numbers of workers gave up looking for jobs in...
3. Please list the 4 key supply side growth factors we discussed, and discuss their viability...
3. Please list the 4 key supply side growth factors we discussed, and discuss their viability in terms of getting our economy growing again, given that today our economy is not growing. a. The slides should provide you with what you need here. b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will likely cause us problems?...
Your right-hand-side variable is likely correlated with some unobservable characteristics of the people in your sample...
Your right-hand-side variable is likely correlated with some unobservable characteristics of the people in your sample which are important for explaining your left-hand-side variable. You have two potential instruments that you believe might be correlated with your RHS variable but not with the unobservables. What test could you perform to determine if instrumental variables are necessary for consistent estimates? What is the intuition behind this test? What test could you use to check the assumption that your instruments are uncorrelated...
List 4 (four) important demographic segmentation variables (with breakdown) for your chosen new product. Use a...
List 4 (four) important demographic segmentation variables (with breakdown) for your chosen new product. Use a table to present your answer.
(Weighted average cost of capital—weights) A company has the following right-hand side of its balance sheet:...
(Weighted average cost of capital—weights) A company has the following right-hand side of its balance sheet: Bonds payable = $250,000 Preferred stock (1000 shares) = $100,000 Common stock (200,000 shares) = $400,000 -------------------------------------------------------------- Total Liabilities + Equity = $750,000 Bonds payable are currently priced at 115 (115% of face value) in the market, preferred stock is selling at $70 per share, and common stock is selling at $20 per share. Management has announced that it is targeting a capital structure...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT