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ECS3706 Assignment 2 Semester 2 2023 Due Date: 29 September 2023 (Complete Answers)
ECS3706 Assignment 2 Semester 2 2023 Complete answers for all the questions provided in your assignment. All answers have been completed in accordance with the corresponding questions and should be used as guidelines.
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QUESTION A1
a.
· Definition: The stochastic error term, also known as the disturbance term or the random error term, represents the unexplained variation in the dependent variable that cannot be accounted for by the independent variables. It is a theoretical concept that is not directly observable. On the other hand, the residual refers to the actual difference between the observed value of the dependent variable and the predicted value based on the independent variables. It is calculated as the observed value minus the predicted value.
· Representation: The stochastic error term is typically denoted by “ε” or “u” in equations and models, whereas the residual is denoted by “e” or “r”. The stochastic error term is usually represented in mathematical equations and models, while the residual is calculated and observed in numerical values.
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