Example 1110

R&D EXPENDITURE, SALES, AND PROFITS IN 18 INDUSTRY GROUPINGS IN THE UNITED STATES, 1988

Table 11.5 gives data on research and development (R&D) expenditure, sales, and profits for 18 industry groupings in the United States, all figures in millions of dollars. Since the cross-sectional data presented in this table are quite heterogeneous, in a regression of R&D on sales (or profits), heteroscedasticity is likely. The regression results were as follows:

R&D = 192.9931 + 0.0319 Sales, se = (533.9317) (0.0083) (11.7.3)

Unsurprisingly, there is a significant positive relationship between R&D and sale.

To see if the regression (11.7.3) suffers from heteroscedasticity, we obtained the residuals, Ui, and the squared residuals, u2, from the preceding regression and plotted them against sales, as shown in Figure 11.13. It seems from this figure that there is a systematic

(Continued)

424 PART TWO: RELAXING THE ASSUMPTIONS OF THE CLASSICAL MODEL

EXAMPLE 11.10 (Continued)

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