1.7.6.md

Solution to Review Question

by Qiang Gao, updated at May 20, 2017

---

Chapter 1 Finite-Sample Properties of OLS

Section 7 Application: Returns to Scale in Electricity Supply

...

Review Question 1.7.6

Why is the $$R^2$$ of 0.926 from the unrestricted model (1.7.7) lower than the $$R^2$$ of 0.932 from the restricted model (1.7.8)?

Solution

That is because the dependent variable in the restricted regression is different from that in the unrestricted regression. If the dependent variable were the same, then indeed the $$R^2$$ should be higher for the unrestricted model.

---

Copyright ©2017 by Qiang Gao