Consider the simple regression model Yi = β0 + β1Xi + ui where Xi > 0 for all i, and the conditional variance is var(ui
Xi)= θX where θ is a known constant with θ > 0.
(a)Write the weighted regression as i = β0
0i + β1
1i + i. How would you construct i, 0i and 1i?
(b)Prove that the variance of is i homoskedastic.
(c)Which coefficient is the intercept in the modified regression model? Which is the slope?
(d)When interpreting the regression results, which of the two equations should you use, the original or the modified model?