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Method of Estimating A Function: The Regression Technique
Method of Estimating A Function: The Regression Technique
METHOD OF ESTIMATING A
FUNCTION: THE
REGRESSION TECHNIQUE
Learning Objectives
Nature of the managerial problem and use of functions
Method of formulating a function
Estimation of a linear function : A simple regression
technique
Multivariate regression
Tests in multivariate regression estimates
Regression
A statistical technique used to qualify the relationship
between interrelated economic variables.
Used in physical and social studies, where problem of specifying
the relationship between two or more variables is involved.
Estimation of the coefficients
of the independent variables.
Measurement of the
reliability of the estimated
coefficients
Suppose a hypothesis, the sales growth is a function of adexpenditure, this hypothesis can be translated into a
mathematical function
Y = A + Bx
where, Y = sales, X = ad-expenditure and A and B are constants.
Ordinary Least
Square (OLS)
method
Regression
Method
Testing the
significance of
estimated
parameters
Test of goodness of
fit (the coefficient of
determination)
Ordinary Least
Square (OLS)
method:
This method uses the
sum of the square of
the error terms that
regression technique
seeks to minimize and
find the values of a and
b that produce the best
fit line.
Explained variation in Y
Total variation in Y
Multivariate Regression
Number of
observations
Number of independent
or explanatory variables
Summary
Formulation of a function is required to identify the dependent
and independent variables and to determine the nature and
extent of relationship between them.
Method of Formulating a Function is formulation of a
hypothesis and translating the hypothesis into a function
Regression is a statistical technique used to measure the
Understand
the conceptvariables.
of managerial
relationship between
economic
economics
Regression Function includes estimating the error term,
ordinary least square method, testing the significance of
estimated parameters and test of goodness of fit
In multivariate regression dependent variable is the function
of more than one independent or explanatory variables.
Tests in Multivariate includes coefficients of multiple
determination & adjusted R2 multi-collinearity, Heteroscedasticity and autocorrelation or serial correlation