Question

Compare the below two models by commenting on the three different measures: (10)

	Model 1 Model 2
Multiple R	0.8675	0.8676
R Square	0.7526	0.7527
Adjusted R Square	0.7423	0.7312
Standard Error	63.26	64.61
Observations	26	26

Answer 1

Although the differences are very small, mutiple R and R-square is higher in Model 2. Whereas the adjusted R-square is higher in Model 1. We know unlike R-square, adjusted R-square will add penalty to the model if a variable is added in the model with poor explanatory power. On the other hand R-square will keep on increasing if variable are added in the model. Therefore, adjusted R-square is a better measure of the goodness of fit of the model. As, the adjusted R-square is higher in Model 1, Model 1 is a bit better than Model 2.