A researcher estimates the following two econometric models yt = 1 + 2x2t + 3x3t + ut
Question:
A researcher estimates the following two econometric models yt = β1 + β2x2t + β3x3t + ut (3.56)
yt = β1 + β2x2t + β3x3t + β4x4t + vt (3.57)
where ut and vt are iid disturbances and x3t is an irrelevant variable which does not enter into the data generating process for yt . Will the value of
(a) R2,
(b) Adjusted R2, be higher for the second model than the first? Explain your answers.
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