Question

Suppose I have three variables in my dataset called testscr, str, and income. I first execute the command "reg testscr str, r". Then I execute the command "reg testscr str income, r". Suppose that str and income are positively correlated and the coefficient on income in the second regression was positive. Then how should the coefficient on str in the second regression compare to the coefficient on str in the first regression? Please explain the reasoning behind your answer.

1) it cannot be determined
2) it should be equal to the coefficient on str in the first regression
3) it should be greater than coefficient on str in the first regression
4) it should be less than coefficient on str in the first regression

Answer 1

4. It should be less than coefficient on str in the first regression

Explanation:

Since the str and income are positively correlated and the coefficient on income in the second regression is positive, the coefficient on str in the second regression therefore should be less than coefficient on str in the first regression.