Answer to Question #220337 in Economics for Nana K

Question

Explain multicollinearity and the consequences one is likely to encounter in cases of
near or high multicollinearity (3 marks)
ii. Define Variance Inflation Factor and explain how it can be used to detect the presence
of multicollinearity in a model. (3 marks)
iii. Consider the following estimated Ordinary Least Square results where the sample size
is 5
Yt = 1.2108 + 0.4014X2i + 0.0270X3i
Se (0.7480) (0.2721) (0.1252)

R
2 = 0.8143, r23 = 0.8285 (correlation between X2i and X3i)
Is multicollinearity present in the model? Give reasons to support your answer. (3

Answer 1

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