ECON301_Handout_01_1213_02

# Β but we have only one equation there is an infinity

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β ) but we have only one equation, there is an infinity of solutions to this equation: 0 β and 1 β are not identified . Hence, we see that if the X t values in a given sample are all same, then there is perfect linear relationship between independent variables, hence the problem becomes ill-posed. In other words, the problem becomes again unsolvable ! This is another example of perfect (multi)collinearity . Consequently, if the model to be estimated has an intercept term then, the independent variable X must take at least two different values . In some textbooks this condition is stated as a separate assumption of the classical linear regression model. However, as we have seen, this assumption is not needed if we assume that there are no exact linear relationship between the independent variables (No perfect multicollinearity) ”. Instructor: Dr. Ozan ERUYGUR e-mail: Lecture Notes 17
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