Question

Consider the multiple regression model with two regressors X1 and X2, where both variables are determinants of the dependent variable Y. You first regress Y on X1 and find no relationship. However, while regressing Y on X1 and X2 the slope coefficient of the variable X1 changes by a large amount. This suggests that your first regression suffers from:

A. Perfect multicollinearity
B. Dummy variable trap
C. Omitted variable bias
D. Heteroskedasticity

Answer 1

C. Omitted variable bias

Explanation:

In mathematics and statistics, omitted-variable bias (OVB) happens if one or more important variables is left out by a statistical model.

The bias results in the equation being related to the expected effects of the included variables by the influence of the excluded variables.