Instead of estimating a true cost function, which is described as a quadratic, where costs are regressed on an intercept, output and a quadratic term in output, a researcher estimates a linear function by regressing costs on an intercept and output. The estimates from the linear cost function are likely to
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Misspecification and measurement error has come up 11 times in 4 exams since 2011.
This question is on Irrelevant variables and functional-form misspecification, part of Misspecification and measurement error in Econometrics.
The cost of including a variable that does not belong, and of using the wrong functional form.
TestStop has 7 past-paper questions on this subtopic.
Question from the DSE 2016 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.