Case 5 Flashcards
Which of the following options provides the most compelling reason for excluding the intercept?
a) The economic logic of the problem implies that all the slope coefficients of our models should be strictly positive: this is ensured by excluding the intercept.
b) The economic logic of the problem implies that, if production is zero, the predicted amount of the cost driver should be zero.
c) Excluding the intercept helps to prevent collinearity.
d) When we did include an intercept, it turned out to be extremely insignificant
b)
You can easily check that none of model A)’s slope coefficients is significantly different from zero at the conventional 5% level. In a model-building process, the standard response would be to remove such insignificant variables sequentially from the model. E.g., we might consider the removal of CLR4, the explanatory variable representing the output of 4-color shirts.15. Given the nature of the problem, which of the following statements about this proposal is the most adequate?
a) This is not a good idea: one should start by removingCLR6 since the coefficient of this explanatory variable has an even higher P-value of 0.723.
b) This is not a good idea, because it would imply that the production of 4-color shirts does not require purchasing orders.
c) This is not a good idea, because the firm does actually produce positive quantities of 4-color shirts.
d) This is a good idea because it will definitely lead to a model with a higher adjusted R2.
b)
