University of Western Ontario Linear Regression Function Questions

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Short Answers

Consider the linear regression function

AHE = ?0 + ?1College + ?2F emale + ?3Age + ?4Expr + ?5NE + ?6MW + ?7S + ?8OR + U,

where

– AHE: indicates the average hourly earning

– College: is a dummy variable indicating whether the individual has completed college

– F emale: is a dummy variable indicating whether the individual is a female or not

– Age: indicates the age

– Expr: indicates the years of work experience

– NE: is a dummy variable indicating whether the individual comes from the Northeast

– MW: is a dummy variable indicating whether the individual comes from the Midwest

– S: is a dummy variable indicating whether the individual comes from the South

– OR: is a dummy variable indicating whether the individual comes from other regions (other than NE,

MW or S)

(1) There exists a problem in the above linear regression function, due to which the OLS estimators

are not computed. State what the problem is and write down a modifified version of the regression

function to solve the problem.

(2) Based on the modifified version of the regression function from (1), perform a White test to check

whether there exists signifificant heteroskedasticity at the 5% signifificance level. Clearly write out your

test procedure.