Nandita Summers works at Modus, a store that caters to fashion for young adults.

Nandita is
responsible for the store’s online advertising and promotion budget. For the past year, she has
studied search engine optimization and has been purchasing keywords and display advertising on
Google, Facebook, and Twitter. In order to analyze the effectiveness of her efforts and to decide
whether to continue online advertising or move her advertising dollars back to traditional print
media, Nandita collects the following data:

Required:
1. Nandita performs a regression analysis, comparing each month’s online advertising expense with
that month’s revenue. Verify that she obtains the following result:

Revenue = $51,999.64 – (0.98 × Online advertising expense)

Variable Coefficient Standard Error t-Value

Constant $51,999.64 7,988.68 6.51
Independent variable: Online advertising expense –0.98 1.99 –0.49
r = 0.02; Durbin-Watson statistic = 2.14
2

2. Plot the preceding data on a graph and draw the regression line. What does the cost formula
indicate about the relationship between monthly online advertising expense and monthly
revenues? Is the relationship economically plausible?
3. After further thought, Nandita realizes there may have been a flaw in her approach. In particular,
there may be a lag between the time customers click through to the Modus website and peruse its
social media content (which is when the online ad expense is incurred) and the time they actually
shop in the physical store. Nandita modifies her analysis by comparing each month’s sales
 revenue to the advertising expense in the prior month. After discarding September revenue and
August advertising expense, show that the modified regression yields the following:

Revenue = $28,361.37 + (5.38 × Online advertising expense)

Variable Coefficient Standard t-

Error Value
Constant $28,361.37 5,428.69 5.22
Independent variable: Previous month’s online advertising 5.38 1.31 4.12
expense r = 0.65; Durbin-Watson statistic = 1.71
2

4. What does the revised formula indicate? Plot the revised data on a graph. Is this relationship
economically plausible?
5. Can Nandita conclude that there is a cause-and-effect relationship between online advertising
expense and sales revenue? Why or why not?

SOLUTION

min.) Interpreting regression results, matching time periods

1. Here is the summary output for the monthly regression of Sales Revenue on Online
Advertising Expense:

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.15
R Square 0.02
Adjusted R
Square -0.07
Standard Error 11837.30
Observations 12.00

ANOVA
Significance
  df SS MS F F
Regression 1 33972689.79 33972690 0.242451 0.633072
Residual 10 1401216525 1.4E+08
Total 11 1435189215      

Coefficient Standard Upper

  s Error t Stat P-value Lower 95% 95%
Intercept 51999.64 7988.68 6.51 0.00 34199.74 69799.54
X Variable 1 -0.98 1.99 -0.49 0.63 -5.41 3.45
2. SOLUTION EXHIBIT 10-46A presents the data plot for the initial analysis. The formula
of Sales Revenue = $52,000 – (0.98 × Online advertising expense) indicates that there is a fixed
amount of revenue each month of $52,000, which is reduced by 0.98 times that month’s online
advertising expense.  This relationship is not economically plausible, as advertising would not
reduce revenue.  The data points do not appear linear, and the r-square of 0.02 indicates a very
weak goodness of fit (in fact, almost no fit at all).