Question: 10.2 Consider the binary variable version of the fixed effects model in Equation (10.11), except with an additional regressor, D1i; that is, let Yit =

10.2 Consider the binary variable version of the fixed effects model in Equation

(10.11), except with an additional regressor, D1i; that is, let Yit = b0 + b1Xit + g1D1i + g2D2i + g+ gnDni + uit.

a. Suppose that n = 3. Show that the binary regressors and the “constant”

regressor are perfectly multicollinear; that is, express one of the variables D1i, D2i, D3i, and X0,it as a perfect linear function of the others, where X0,it = 1 for all i, t.

b. Show the result in

(a) for general n.

c. What will happen if you try to estimate the coefficients of the regression by OLS?

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