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In regression analysis, why do we include residual or error terms? The relationship between response and explanatory variables is not deterministic (or exact). We need the error term as a new variable for explanatory variables. Both: The relationship between response and explanatory variables is not deterministic (or exact), and We need the error term as a new variable for explanatory variables. When we fit a regression between price and demand (in thousand dollars), we get an equation: demand =
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