Table 6.5 contains output for the two models y b1 b2x b3w e y b1 b2x e obtained

Table 6.5 contains output for the two models y ¼ b1 þ b2x þ b3w þ e y ¼ b1 þ b2x þ e obtained using N ¼ 35 observations. RESET applied to the second model yields F-values of 17.98 (for ^y2

) and 8.72 (for ^y2 and ^y3

). The correlation between x and w is rxw ¼ 0:975. Discuss the following questions:

(a) Should w be included in the model?

(b) What can you say about omitted-variable bias?

(c) What can you say about the existence of collinearity and its possible effect?