Econ 399 Chapter3c - Assumption MLR.3 Notes (No Perfect...

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Assumption MLR.3 Notes (No Perfect Collinearity) Perfect Collinearity can exist if: 1) One variable is a constant multiple of another 2) Logs are used inappropriately 3) One variable is a linear function of two or  more other variables In general, all of these issues are easy to fix,  once they are identified.
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Assumption MLR.3 Notes (No Perfect Collinearity) 1) One variable is a constant  multiple of another -ie: Assume that Joe only drinks coffee at work,  and drinks exactly 3 cups of coffee every day  he works.  Therefore: (ie) 3(work) offee = C -including both coffee and work in the regression  would cause perfect collinearity; the regression  would fail
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Assumption MLR.3 Notes (No Perfect Collinearity) 2) Logs are used inappropriately -Consider the following equation and apply log  rules: u geek hotness u geek geek hotness u geek geek hotness + + + = + + + = + + + = ) log( ) 2 ( ) log( 2 ) log( ) log( ) log( 2 1 0 2 1 0 2 2 1 0 β -a variable is included twice, causing an inability  to estimate B 1  and B 2  separately -note that geek and geek 2  could both have been  used, as they are not linearly related
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Assumption MLR.3 Notes (No Perfect Collinearity) 3) One variable is a linear function of two or more  other variables -Consider a teenager who spends all their income 
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Econ 399 Chapter3c - Assumption MLR.3 Notes (No Perfect...

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