Explain omitted variable bias.

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Here is the explanation for Question 1.1:

Explain omitted variable bias.
Omitted variable bias occurs in a regression model when a relevant independent variable is left out of the model, and this omitted variable is correlated with both the included independent variables and the dependent variable. This leads to biased and inconsistent estimates of the coefficients for the included variables.
Distinguish between positive and negative bias.
- Positive bias occurs when the estimated coefficient of an included variable is larger than its true value. This happens if the omitted variable is positively correlated with both the included variable and the dependent variable.
- Negative bias occurs when the estimated coefficient of an included variable is smaller than its true value. This happens if the omitted variable is negatively correlated with the included variable and positively correlated with the dependent variable, or vice versa.

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