SIMPLE LINEAR REGRESSION

Problem 1: Consider the data in Table P-3 where X = weekly advertising expenditures and Y
= weekly sales.

Y ($) X ($) Y ($) X ($)

1,250 41 1,300 46
1,380 54 1,400 62
1,425 63 1,510 61
1,425 54 1,575 64
1,450 48 1,650 71

a. Does a significant relationship exist between advertising expenditures and sales?

b. State the prediction equation.
c. Forecast sales for an advertising expenditure of $50.
d. What percentage of the variation in sales can be explained with the prediction equation?
e. State the amount of unexplained variation.

Problem 2: Lori Franz, maintenance supervisor for the Baltimore Transit Authority, would
like to determine whether there is a positive relationship between the annual maintenance
cost of a bus and its age. If a relationship exists, Lori feels that she can do a better job of
forecasting the annual bus maintenance budget. She collects the data shown in Table P-5.

Bus Maintenance Cost ($) Age

Y (years)
X
1 859 8
2 682 5
3 471 3
4 708 9
5 1,094 11
6 224 2
7 320 1
8 651 8
9 1,049 12

a. Plot a scatter diagram.

b. What kind of relationship exists between these two variables?
c. Compute the correlation coefficient.
d. Determine the least squares line.
e. Test for the significance of the slope coefficient at the .05 significance level. Is the
correlation significant? Explain.
f. Forecast the annual maintenance cost for a five-year-old bus

Problem 3: Ed Bogdanski, owner of the American Precast Company, has hired you as a part
time analyst. Ed was extremely pleased when you determined that there is a positive
relationship between the number of building permits issued and the amount of work available
to his company. Now he wonders if it is possible to use knowledge of interest rates on first
mortgages to predict the number of building permits that will be issued each month. You
collect a random sample of nine months of data, as shown in Table P-11.

Month Building Permits Interest Rate (%)

Y X
1 786 10.2
2 494 12.6
3 289 13.5
4 892 9.7
5 343 10.8
6 888 9.5
7 509 10.9
8 987 9.2
9 187 14.2

a. Plot the data as a scatter diagram.

b. Determine the fitted regression function.
c. Test for the significance of the slope coefficient at the .05 significance level.
d. When the interest rate increases by 1%, what is the average decrease in the number of
building permits issued?
e. Compute the coefficient of determination

Problem 4:The data in Table P-14 were collected as part of a study of real estate property
evaluation. The numbers are observations on X= assessed value (in thousands of dollars) on
the city assessor’s books and Y= market value (selling price in thousands of dollars) for n=30
parcels of land that sold in a particular calendar year in a certain geographical area.

Parcel Assessed Market Parcel Assessed Market

1 68.2 87.4 16 74.0 88.4
2 74.6 88.0 17 72.8 93.6
3 64.6 87.2 18 80.4 92.8
4 80.2 94.0 19 74.2 90.6
5 76.0 94.2 20 80.0 91.6
6 78.0 93.6 21 81.6 92.8
7 76.0 88.4 22 75.6 89.0
8 77.0 92.2 23 79.4 91.8
9 75.2 90.4 24 82.2 98.4
10 72.4 90.4 25 67.0 89.8
11 80.0 93.6 26 72.0 97.2
12 76.4 91.4 27 73.6 95.2
13 70.2 89.6 28 71.4 88.8
14 75.8 91.8 29 81.0 97.4
15 79.2 94.8 30 80.6 95.4

a. Plot the market value against the assessed value as a scatter diagram.
b. Assuming a simple linear regression model, determine the least squares line relating
market value to assessed value.
c. Determine and interpret its value.
d. Is the regression significant? Explain.
e. Predict the market value of a property with an assessed value of 90.5. Is there any danger
in making this prediction?

Problem 5: Player costs (X) and operating expenses (Y) for n=26 major league baseball
teams for the 1990–1991 season are given in Table P-15.

Team Player Cost Operating

X( $ millions) Expenses
Y( $ millions)
1 29.8 59.6
2 36.0 72.0
3 35.2 70.4
4 29.7 62.4
5 35.4 70.8
6 15.8 39.5
7 18.0 60.0
8 23.2 46.4
9 29.0 58.0
10 20.7 47.6
11 30.4 60.8
12 21.7 43.4
13 39.2 66.6
14 34.3 61.7
15 33.3 53.3
16 27.1 48.8
17 24.4 48.8
18 12.1 31.5
19 24.9 49.8
20 31.1 54.4
21 20.4 40.8
22 24.1 48.2
23 17.4 41.8
24 26.4 50.2
25 19.5 46.8
26 21.8 43.6

a. Assuming a simple linear regression model, determine the equation for the fitted straight
line.
b. Determine and comment on the strength of the linear relation.
c. Test for the significance of the regression with a level of significance of .10.
d. Can we conclude that, as a general rule, operating expenses are about twice player costs?
Discuss.
e. Forecast operating expenses, with a large-sample 95% prediction interval, if player costs
are $30.5 million.
Problem 6: The ABC Investment Company is in the business of making bids on investments
offered by various firms that want additional financing. ABC has tabulated its bids on the last
25 issues in terms of their percentage of par value. The bids of ABC’s major competitor, as a
percentage of par value, are also tabulated on these issues. ABC now wonders if it is using
the same rationale as its competitor in preparing bids. In other words, could ABC’s bid be
used to forecast the competitor’s bid? If not, then the competitor must be evaluating issues
differently. The data are given in Table P-9.

Issue ABC Bid Competitor Bid

1 99.035 100.104
2 104.358 105.032
3 99.435 99.517
4 96.932 95.808
5 98.904 98.835
6 101.635 101.563
7 100.001 101.237
8 98.234 99.123
9 93.849 94.803
10 99.412 100.063
11 99.949 99.564
12 104.012 101.889
13 99.473 99.348
14 100.542 99.936
15 96.842 95.834
16 99.2 99.863
17 101.614 101.01
18 99.501 99.432
19 100.898 99.965
20 97.001 96.838
21 100.025 100.804
22 103.014 104.3
23 98.702 99.01
24 101.834 100.939
25 102.903 103.834

Problem 7: Outback Steakhouse grew explosively during its first years of operation. The
numbers of Outback Steakhouse locations for the period 1988–1993 are given below.
TABLE P-16

Year 1988 1989 1990 1991 1992 1993

Number of
2 9 23 49 87 137
locations
a. Does there appear to be linear or exponential growth in the number of
steakhouses?
b. Estimate the annual growth rate for Outback Steakhouse over the 1988–1993
period.