Symbols in the LRM
Problem
In the LRM \(y_i=β_1+β_2x_i+ε_i\) we have 5 different symbols, \(y_i,x_i,ε_i,β_1,β_2\)
- What are the names of these 5 symbols?
- Which of them are observed by the econometrician and which are not?
- Which of them are modelled as random variables and which are not?
Solution
- Dependent variable, explanatory variable, error term, beta parameter 1, beta parameter 2
- Observed: \(y_i,x_i\) . Not observed: \(ε_i,β_1,β_2\)
- Random variables (before experiment): \(y_i,x_i,ε_i\) . Parameters: \(β_1,β_2\)