A microeconomist wants to determine how corporate sales are influenced by capital and wage spending by companies. She proceeds to randomly select 26 large corporations and record information in millions of dollars. A statistical analyst discovers that capital spending by corporations has a significant inverse relationship with wage spending. What should the microeconomist who developed this multiple regression model be particularly concerned with?
A. Randomness of error terms
C. Normality of residuals
D. Missing observations
She should be particularly concerned with collinearity. The regression model the microeconomist is considering has a single dependent or "response" variable (Corporate Sales) and two independent or "explanatory" ...
This solution gives a concise explanation of the meaning of collinearity in a multiple regression model. It covers why collinearity is a concern in the particular model described in the problem.