MGT 6203 MIDTERM – SOLUTION KEY THEORY PART 1 QUESTIONS with ANSWERS

MIDTERM – SOLUTION KEY THEORY QNS *Q1) Consider a linear regression model with 2 independent variables (assume both are correlated with the response variable). If we add an interaction term between the independent variables to the model, how will the model be affected: A) The R2 will increase (or remain the same) with certainty while the adjusted R2 can increase or decrease B) Both the R2 and adjusted R2 will increase with certainty. C) The R2 will decrease (or remain the same) with certainty while the adjusted R2 can increase or decrease D) Both the R2 and adjusted R2 will decrease with certainty. Solution A: The R2 is bound to increase with the addition of new variables or stay the same if the interaction variable doesn’t improve model. The adjusted R2 adds a penalty term on the number of variables in the model, hence it may go down or up (if the new interaction variable offers significant predictive performance). (Week 1 Lesson 4) *Q2) Consider the correlation matrix of independent variables below. What pair of variables would be least valuable to use in a linear regression model? A) Education and Income B) CompPrice and Price C) Population and CompPrice D) Income and Price