Explanation

When the variance of the error term is an increasing function of the explanatory variable, this indicates heteroscedasticity rather than homoscedasticity.

Key Concepts:

• Homoscedasticity: The variance of the error terms is constant across all values of the explanatory variables
• Heteroscedasticity: The variance of the error terms changes with the values of the explanatory variables

Why Option A is Correct:

The question explicitly states that "the variance of the error term is an increasing function of the explanatory variable," which directly violates the homoscedasticity assumption. In homoscedastic models, the error variance should remain constant regardless of the explanatory variable's value.

Why Other Options are Incorrect:

• B. Multicollinearity: This occurs when explanatory variables are highly correlated with each other, not related to error variance patterns
• C. Model is linear: This refers to the functional form of the relationship between variables, not error variance properties
• D. No autocorrelation between error terms: This deals with correlation between error terms across time periods, not variance patterns

Implications:

Heteroscedasticity can lead to inefficient parameter estimates and incorrect standard errors, affecting hypothesis testing reliability.