Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 2

In Problem, the R-squared from estimating the model log(salary) = ?Q + ?1log(sales) + ?2log(mktval) + ?3profmarg + ?4ceoten + ?5comten + u, using the data in CEOSAL2.RAW, was R2 = .353 (n = 177). When ceoten2 and comten2 are added, R2 = .375. Is there evidence of functional form misspecification in this model?

Step 1 of 2

The given old functional specification form of the model is:

When the variables andare added, the new functional specification form of the model is expected to be:

The functional form of the model in which the variables andare omitted is said to be mis-specified, if it could be shown that the variables andare jointly significant.

In order to test for the joint significance of the variables and, it is appropriate to do F-test

Consider the degree of freedom in the numerator= number of new variables in the new functional specification form of the model =, since the two variables andare included

Consider the number of variables in the new model specification is

The degree of freedom in denominator=