INTRODUCTORY ECONOMETRICS EXERCISE 3

The National University of Lesotho

Department of Economics
Lecturer: Mr. L. J. Mantsi
2021/22
(e) If there were heteroscedasticity in the pooled model above what would this imply for the
properties of the OLS estimates? Discuss the potential problems that arise from this for the
estimated coefficients and standard errors and the possible solutions to these problems

(f) Suppose you suspect the presence of multi-collinearity between age and Education. You now
calculate the correlation coefficient between the two variable and obtain it as 0.0432. Briefly
explain why there might be multi-collinearity between the two and formally test for it.

(g) Suppose the error variances varies with age and education. As an Econometrician you run an
AUXILLIARY Regression model using the residuals as a proxy for population variance. The
resulting R-Squared is 0.00023. Can you test formally for the presence of
HETEROSCEDASTICY?