Question

The assumption of constant variability of observations often breaks down in studies with cross-sectional data. Consider the model y = β0 + β1x + ɛ, where y is a household's consumption expenditure and x is its disposable income. It may be unreasonable to assume that the variability of consumption is the same across a cross-section of household incomes. This violation is called:

A. Nonlinear Patterns
B. Multicollinearity
C. Changing variability
D. Correlated Observations

Answer 1

The violation described in the question is called Changing Variability. It refers to the assumption of constant variability of observations in studies with cross-sectional data, which may not hold true.

Step-by-step explanation:

The violation described in the question is called Changing Variability.

This assumes that the variability of consumption is the same across a cross-section of household incomes, which may not be reasonable. In studies with cross-sectional data, it is common for the assumption of constant variability to break down.

For example, in the given model y = β0 + β1x + ɛ, where y is a household's consumption expenditure and x is its disposable income, it may not be reasonable to assume that the variability of consumption is the same for all levels of income.