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Answer: Omitted variable bias occurs when the omitted variable is correlated with the included regressor and is a determinant of the dependent variable.
Omitted variable bias occurs when a model improperly omits one or more variables that are critical determinants of the dependent variable and are correlated with one or more of the other included independent variables. Omitted variable bias results in an over- or under-estimation of the regression parameters. **Key Points:** - For omitted variable bias to occur, two conditions must be met: 1. The omitted variable must be correlated with an included regressor 2. The omitted variable must be a determinant of the dependent variable - When both conditions are satisfied, the estimated coefficients for the included regressors become biased and inconsistent - This bias occurs because the omitted variable's effect gets incorrectly attributed to the included variables it's correlated with - Option A correctly identifies both necessary conditions for omitted variable bias
Author: LeetQuiz Editorial Team
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The proper selection of factors to include in an ordinary least squares estimation is critical to the accuracy of the result. When does omitted variable bias occur?
A
Omitted variable bias occurs when the omitted variable is correlated with the included regressor and is a determinant of the dependent variable.
B
Omitted variable bias occurs when the omitted variable is correlated with the included regressor but is not a determinant of the dependent variable.
C
Omitted variable bias occurs when the omitted variable is independent of the included regressor and is a determinant of the dependent variable.
D
Omitted variable bias occurs when the omitted variable is independent of the included regressor but is not a determinant of the dependent variable.
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