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Business Statistics: A Decision-Making Approach: Introduction To Linear Regression and Correlation Analysis
Business Statistics: A Decision-Making Approach: Introduction To Linear Regression and Correlation Analysis
13-1
Business Statistics:
A Decision-Making Approach
6th Edition
Chapter 13
Introduction to Linear Regression
and Correlation Analysis
Chap 13-1
Chapter Goals
To understand the methods for displaying and
describing relationship among variables
Chap 13-2
Chapter 13
13-2
Graphical
Scatterplots
Line plots
3-D plots
Models
Linear regression
Correlations
Frequency tables
Chap 13-3
Chap 13-4
Chapter 13
13-3
YDI 7.1
Response ( y)
Explanatory (x)
Height of son
Weight
Chap 13-5
Chap 13-6
Chapter 13
13-4
Example
Chap 13-7
Curvilinear relationships
y
x
y
x
y
x
Fundamentals of Business Statistics Murali Shanker
x
Chap 13-8
Chapter 13
13-5
x
y
x
Fundamentals of Business Statistics Murali Shanker
Chap 13-9
Correlation Coefficient
(continued)
Chap 13-10
Chapter 13
13-6
Features of and r
Unit free
Range between -1 and 1
The closer to -1, the stronger the negative
linear relationship
The closer to 1, the stronger the positive
linear relationship
The closer to 0, the weaker the linear
relationship
Chap 13-11
Examples of Approximate
r Values
Tag with appropriate value:
-1, -.6, 0, +.3, 1
x
x
x
Fundamentals of Business Statistics Murali Shanker
x
Chap 13-12
Chapter 13
13-7
Earlier Example
Correlations
Exam1
Exam1
Exam2
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Exam2
.400**
.000
351
1
1
366
.400**
.000
351
356
Chap 13-13
YDI 7.3
What kind of relationship would you expect in the
following situations:
age (in years) of a car, and its price.
Chap 13-14
Chapter 13
13-8
YDI 7.4
Identify the two variables that vary and decide
which should be the independent variable and
which should be the dependent variable.
Sketch a graph that you think best represents
the relationship between the two variables.
1.
The size of a persons vocabulary over his or
her lifetime.
2.
The distance from the ceiling to the tip of the
minute hand of a clock hung on the wall.
Fundamentals of Business Statistics Murali Shanker
Chap 13-15
Chap 13-16
Chapter 13
13-9
Chap 13-17
No Relationship
Chap 13-18
Chapter 13
13-10
Population
Slope
Coefficient
Independent
Variable
y = 0 + 1x +
Linear component
Random
Error
term, or
residual
Random Error
component
Chap 13-19
Chap 13-20
10
Chapter 13
13-11
(continued)
Observed Value
of y for xi
Predicted Value
of y for xi
Slope = 1
Random Error
for this x value
Intercept = 0
xi
Fundamentals of Business Statistics Murali Shanker
Chap 13-21
Estimate of
the regression
intercept
Estimate of the
regression slope
y i = b0 + b1x
Independent
variable
Chap 13-22
11
Chapter 13
13-12
Earlier Example
Chap 13-23
Residual
A residual is the difference between the
observed response y and the predicted
response . Thus, for each pair of observations
(xi, yi), the ith residual is
ei = yi i = yi (b0 + b1x)
Chap 13-24
12
Chapter 13
13-13
(y y)
(y (b
+ b1x))2
Chap 13-25
Interpretation of the
Slope and the Intercept
Chap 13-26
13
Chapter 13
13-14
b1 =
( x x )( y y )
(x x)
2
algebraic equivalent:
b1 =
x y
xy
n
( x) 2
2
x n
and
b0 = y b1 x
Chap 13-27
Chap 13-28
14
Chapter 13
13-15
Chap 13-29
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Chap 13-30
15
Chapter 13
13-16
SPSS Output
The regression equation is:
house price = 98.248 + 0.110 (square feet)
Model Summary
Model
1
R
R Square
.762a
.581
Adjusted
R Square
.528
Std. Error of
the Estimate
41.33032
Coefficientsa
Model
1
(Constant)
Square Feet
Unstandardized
Coefficients
B
Std. Error
98.248
58.033
.110
.033
Standardized
Coefficients
Beta
.762
t
1.693
3.329
Sig.
.129
.010
Chap 13-31
Graphical Presentation
House price model: scatter plot and
regression line
House Price ($1000s)
Intercept
= 98.248
450
400
350
300
Slope
= 0.110
250
200
150
100
50
0
0
500
1000
1500
2000
2500
3000
Square Feet
Chap 13-32
16
Chapter 13
13-17
Interpretation of the
Intercept, b0
house price = 98.248 + 0.110 (square feet)
Chap 13-33
Interpretation of the
Slope Coefficient, b1
house price = 98.24833 + 0.10977 (square feet)
Chap 13-34
17
Chapter 13
13-18
Chap 13-35
YDI 7.6
The growth of children from early childhood through adolescence
generally follows a linear pattern. Data on the heights of female
Americans during childhood, from four to nine years old, were
compiled and the least squares regression line was obtained as =
32 + 2.4x where is the predicted height in inches, and x is age in
years.
Interpret the value of the estimated slope b1 = 2. 4.
Would interpretation of the value of the estimated y-intercept, b0 =
32, make sense here?
What would you predict the height to be for a female American at 8
years old?
What would you predict the height to be for a female American at
25 years old? How does the quality of this answer compare to the
previous question?
Chap 13-36
18
Chapter 13
13-19
Coefficient of Determination, R2
0 R2 1
Chap 13-37
Coefficient of Determination, R2
(continued)
Note: In the single independent variable case, the coefficient
of determination is
R2 = r 2
where:
R2 = Coefficient of determination
r = Simple correlation coefficient
Chap 13-38
19
Chapter 13
13-20
Examples of Approximate
R2 Values
y
x
y
x
y
Chap 13-39
Examples of Approximate
R2 Values
R2 = 0
No linear relationship
between x and y:
R2 = 0
Chap 13-40
20
Chapter 13
13-21
SPSS Output
Model Summary
Model
1
R
R Square
.762a
.581
Adjusted
R Square
.528
Std. Error of
the Estimate
41.33032
ANOVAb
Model
1
Regression
Residual
Total
Sum of
Squares
18934.935
13665.565
32600.500
df
1
8
9
Mean Square
18934.935
1708.196
F
11.085
Sig.
.010a
Coefficientsa
Model
1
(Constant)
Square Feet
Unstandardized
Coefficients
B
Std. Error
98.248
58.033
.110
.033
Standardized
Coefficients
Beta
.762
t
1.693
3.329
Sig.
.129
.010
Chap 13-41
Chap 13-42
21
Chapter 13
13-22
SPSS Output
s = 41.33032
Model Summary
Model
1
R
R Square
.762a
.581
Adjusted
R Square
.528
Std. Error of
the Estimate
41.33032
sb1 = 0.03297
Coefficientsa
Model
1
(Constant)
Square Feet
Unstandardized
Coefficients
B
Std. Error
98.248
58.033
.110
.033
Standardized
Coefficients
Beta
.762
t
1.693
3.329
Sig.
.129
.010
Chap 13-43
small s
small sb1
large sb1
large s
Chap 13-44
22
Chapter 13
13-23
Test statistic
b
t= 1 1
sb1
d.f. = n 2
where:
b1 = Sample regression slope
coefficient
1 = Hypothesized slope
sb1 = Estimator of the standard
error of the slope
Chap 13-45
(continued)
House Price
in $1000s
(y)
Square Feet
(x)
245
1400
312
1600
279
1700
308
1875
199
1100
219
1550
405
2350
324
2450
319
1425
255
1700
Chap 13-46
23
Chapter 13
13-24
Coefficients
Intercept
Square Feet
sb1
b1
Standard Error
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
0.10977
0.03297
3.32938
0.01039
d.f. = 10-2 = 8
/2=.025
Reject H0
/2=.025
Do not reject H0
-t/2
-2.3060
Reject H
0
t/2
2.3060 3.329
Decision:
Reject H0
Conclusion:
There is sufficient evidence
that square footage affects
house price
Chap 13-47
b1 t(1/2 )s b1
d.f. = n - 2
Coefficients
Standard Error
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
Lower 95%
-35.57720
Upper 95%
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-48
24
Chapter 13
13-25
Coefficients
Standard Error
t Stat
P-value
98.24833
58.03348
1.69296
0.12892
Lower 95%
-35.57720
Upper 95%
232.07386
0.10977
0.03297
3.32938
0.01039
0.03374
0.18580
Chap 13-49
Residual Analysis
Purposes
Examine for linearity assumption
Examine for constant variance for all
levels of x
Evaluate normal distribution assumption
Graphical Analysis of Residuals
Can plot residuals vs. x
Can create histogram of residuals to
check for normality
Chap 13-50
25
Chapter 13
13-26
residuals
residuals
Not Linear
Fundamentals of Business Statistics Murali Shanker
Linear
Chap 13-51
x
Non-constant variance
residuals
residuals
9Constant variance
Chap 13-52
26
Chapter 13
13-27
Residual Output
RESIDUAL OUTPUT
Predicted
House Price
251.92316
-6.923162
273.87671
38.12329
60
284.85348
-5.853484
40
304.06284
3.937162
218.99284
-19.99284
268.38832
-49.38832
356.20251
48.79749
-40
367.17929
-43.17929
-60
254.6674
64.33264
10
284.85348
-29.85348
Residuals
20
0
-20
1000
2000
3000
Square Feet
Chap 13-53
27