Introductory Econometrics Wooldridge |125 Questions| With Correct Answers.

Equation (2.1) also addresses the issue of the functional relationship between y and x. If the other factors in u are held fixed, so that the change in u is zero, Du 5 0, then x has a linear effect on y: {Ans: Thus, the change in y is simply b1 multiplied by the change in x. This means that b1 is the slope parameter in the relationship between y and x, holding the other factors in u fixed; it is of primary interest in applied economics}In writing down a model that will "explain y in terms of x," we must confront three issues {Ans: First, because there is never an exact relationship between two variables, how do we allow for other factors to affect y? Second, what is the functional relationship between y and x? And third, how can we be sure we are capturing a ceteris paribus relationship between y and x (if that is a desired goal)?}The Meaning of "Linear" Regression {Ans: The key is that this equation is linear in the parameters b0 and b1. There are no restrictions on how y and x relate to the original explained and explanatory variables of