Answer
In specification analysis for simple regression, we check four important assumptions:
1. Linearity: We ensure that the relationship between the dependent variable and the independent variable is linear within the relevant range.
2. **Constant Variance**: We examine if the variance of the residuals (the differences between predicted and actual values) remains consistent for all values of the independent variable.
3. Independence: We assess whether the residuals are independent, meaning that the value of one residual does not affect the value of another.
4. Normal Distribution: We check if the residuals follow a normal distribution pattern.
These assumptions help ensure the accuracy of regression analysis.
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