Question

theories and applications related to linear regression models can be elegant and look impressive in economics books, but there are serious weaknesses in applying them to real world situations, especially for small firms or firms just getting started. what might one or more of those weaknesses be?

Answer 1

As linear regression model is a linear approach of modelling relationship between two variables by fitting a linear equation to observed data. There are two types of linear regression model one is simple and other is multiple linear regression model.

There are various weaknesses or disadvantages of this approach or model as each and every thing has both positive as well as negative side so same is here.

These are :

1. Linear regressions are sensitive to outliers.

2. It is subject to over fitting .

3. Regression solution will be likely dense.

4. It is limited to the linear relationship.

These weaknesses are not real as they can overcome or removed by suitable treatment.