# 3.) Learning to Use Regression Analysis Flashcards

Once a dependent variable is chosen, it is logical to follow this sequence…

- ) Review the literature and develop the theoretical model.
- ) Specify the model: Select the independent variables and the functional form.
- ) Hypothesize the expected signs of the coefficients.
- ) Collect the data. Inspect and clean the data.
- ) Estimate and evaluate the equation
- ) Document the results.

After selecting the dependent variables, the specification of a model involves choosing the following components…

- ) The independent variables and how they should be measured,
- ) the functional (mathematical) form of the variables, and
- ) the properties of the stochastic error term

- A regression equation is specified when each of these elements has been treated appropriately.

A mistake of any of he three components of a model after selecting the dependent variable results in a ….

Specification Error

What should specifying goal be?

to specify only relevant explanatory variables, those expected theoretically to assert a substantive influence on the dependent variable

what sort of other theoretical economic concepts should be included?

Theory also indicates that complementary and substitute goods are important

A dummy variable takes on…

the values of one or zero depending on whether a specified condition holds.

In the demand equation for a final consumption good…

the quantity demanded is expected to inversely related to its price and the price of a complementary good and positively related to consumer income and the price of a substitute good.

The first step in the written development of a regression model..

usually is to express the equation as a general function

Step 4

Collect the Data, Inspect and Clean the Data

All conclusions about signs, significance, and economic theory are…

independent of units of measurement

The excess number of observations (three) over the number of coefficients to be estimated is the …

degrees of freedom

The more degrees of freedom there are, the better because…

When the number of degrees of freedom is large, every positive error is likely to be balanced by a negative error

A constant factor added to a variable alters only…

the intercept term without changing the slope coefficient itself

An outlier is…

an observation that lies outside the range of the rest of the observations, and looking for outliers is an easy way to find data entry errors

Step 5

Estimate and Evaluate the Equation