4.

Consider the regression model, yi = β1 + β2xi2 + · · · + βKxiK + ei where errors may be

heteroskedastic

Choose the most incorrect statement.

(a) The OLS estimators are consistent and unbiased.
(b) We should report the OLS estimates with the robust standard errors.
(c) The Gauss-Markov theorem may not apply.
(d) The GLS cannot be used because we do not know the error variances in practice.
(e) We should take care of heteroskedasticity only if homoskedasticity is rejected. ⇐ Answer

5. Consider the regression model, yt = β1 + β2xt2 + · · · + βKxtK + et , et = ρet−1 + vt with −

1 < ρ < 1 where vt ’s are independent random error terms with mean zero and variance σ 2 v
.
Choose the wrong statement.
(a) OLS is unbiased, consistent, and efficient ⇐ Answer
(b) We may use the OLS estimates with the HAC standard errors
(c) The errors follow an AR(1) process if ρ 6= 0.
(d) V ar(et) = σ 2 v/(1 − ρ 2 ) and Cov(et , et−k) = ρ kσ 2 v/(1 − ρ 2 ) for k > 0.
(e) The Breusch-Godfrey test considers H0 : ρ = 0. 6.

6. For each observation i = 1, · · · , n, the regressor xi,2 indicates “female,” and xi,3 indicates
lipstick users. From the data, it is confirmed that xi,2 and xi,3 are similar, but not the same.
That is, in the sample, there are some women not using a lipstick, and there are some men
using a lipstick. Now, suppose that an econometrician regresses yi on all the regressors
including xi,2 and xi,3 and finds that the standard errors of the OLS estimates are large.

Choose the wrong statement.

(a) This is called the near multicollinearity.
(b) One should find a way to reduce the standard errors to have significant estimates. ⇐
Answer (c) The large standard errors arise naturally due to the difficulty to disentangle the
effect of xi,2 on yi from the effect of xi,3 on yi .
(d) The OLS is unbiased and consistent.
(e) None of the above is wrong. E