You have observations on investments (y) and profits (z) for 100 firms. You assume that you can

fit a linear regression model using OLS as follows:

y=a+BX+€

You want to obtain estimates for a and 3.

a) Suppose every firm in the sample has the same amount of profits. What, if any, problem

would this create?

b) If the distribution of profits were not normal, can we use linear regression? Explain.

c) If profits were presented in categories, would estimating a linear regression model be appro-

priate? Explain.