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In the Case of Perfect Multicollinearity, OLS Is Unable to Estimate

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Essay

In the case of perfect multicollinearity, OLS is unable to estimate the slope coefficients of the variables involved. Assume that you have included both X1 and X2 as explanatory variables, and that X2 = X 21\begin{array} { l } 2 \\1\end{array} , so that there is an exact relationship between two explanatory variables. Does this pose a problem for estimation?


Definitions:

Allowance Method

An accounting technique that estimates and accounts for bad debts expense, reducing accounts receivable by a predicted amount of uncollectible accounts.

Outstanding Receivables

Amounts due to a company for goods or services that have been delivered or sold but not yet paid by customers.

Allowance for Doubtful Accounts

A contra asset account that reflects the estimated amount of accounts receivable that may not be collectible.

Notes Receivable

Written promises for amounts to be received by a business, usually detailing interest and the due date for repayment.

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