Consider the following regression equation: . Which of the following indicates a functional form misspecification in E(y|x)?
A)Ordinary Least Squares estimates equal Weighted Least Squares estimates.
B)Ordinary Least Squares estimates exceed Weighted Least Squares estimates by a small magnitude.
C)Weighted Least Squares estimates exceed Ordinary Least Squares estimates by a small magnitude.
D)Ordinary Least Square estimates are positive while Weighted Least Squares estimates are negative.

Question

Consider the following regression equation:  . Which of the following indicates a functional form misspecification in E(y|x)?
A)Ordinary Least Squares estimates equal Weighted Least Squares estimates. 
B)Ordinary Least Squares estimates exceed Weighted Least Squares estimates by a small magnitude. 
C)Weighted Least Squares estimates exceed Ordinary Least Squares estimates by a small magnitude. 
D)Ordinary Least Square estimates are positive while Weighted Least Squares estimates are negative.

Quizplus · Accepted Answer

A functional form misspecification occurs when the chosen functional form of the regression equation does not match the true relationship between the dependent and independent variables. In this case, the fact that the Ordinary Least Squares estimates are positive while the Weighted Least Squares estimates are negative suggests a possible misspecification in the functional form of the equation, as both methods should produce similar estimates if the equation is correctly specified.

Consider the Following Regression Equation