Let's return to the analysis of the international pharmaceutical industry that we started in Exercise 9 of Chapter 5. That study was cross sectional and included countries as large as the United States and as small as Luxembourg, so you'd certainly expect heteroskedasticity to be a potential problem. Luckily, the dependent variable in the original research was Pi , the pharmaceutical price level in the ith country divided by that of the United States, so the researchers didn't encounter the wide variations in size typically associated with heteroskedasticity.(Do you see why?)

Suppose, however, that we use the same data set to build a model of pharmaceutical consumption: