Suppose we have savings and income data for a cross section of 32 families. It is postulated that savings is linearly related to income, so the econometrician formulates the following model: Yi = β1 + β2Xi + ui. However, the econometrician suspects something not quite right in the data and conducts a test in the following way. He drops the middle 4 observations and performs OLS regressions on the first 13 and the last 13 observations. He observes the residual sum of squares and constructs a statistic as such:. What test is the econometrician conducting, and what is he testing for?

MCQs on Econometrics, which is the use of statistical methods to develop theories or test existing hypotheses in economics or finance.