Assignment of Fundamentals of Econometrics, on

Multiple Regression.

Illustrations
In the below example I have done a multiple regression analysis, where my
dependent variable is profit of the company, and my independent variable are
administration spending, R&D spending and marketing spending.
The data is in the link below:
https://www.dropbox.com/s/z2ue4a1ogefcuo3/50_Startups.csv?dl=0

After doing this regression analysis we will find out by what proportion the
dependent variable i.e. profits of the company changes if one unit change in of
each of the independent variables (i.e. admin spending, R&D spending and
marketing spending) is made.
We will also know the interpretation of various symbols like x intercept (a), slope
(b), p value, R squared, and adjusted R squared.

Dependent Independent Independent Independent

variable (Y) variable one variable two variable three
(X1) (X2) (X3)
Profit Administration R&D Marketing
spending spending spending
 X1 X2 X3 Y
1 R&D Spend AdministrationMarketing Spend
State Profit
2 165349.2 136897.8 471784.1 New York 192261.83
3 162597.7 151377.59 443898.53 California 191792.06
4 153441.51 101145.55 407934.54 Florida 191050.39
5 144372.41 118671.85 383199.62 New York 182901.99
6 142107.34 91391.77 366168.42 Florida 166187.94
7 131876.9 99814.71 362861.36 New York 156991.12
8 134615.46 147198.87 127716.82 California 156122.51
9 130298.13 145530.06 323876.68 Florida 155752.6
10 120542.52 148718.95 311613.29 New York 152211.77
11 123334.88 108679.17 304981.62 California 149759.96
12 101913.08 110594.11 229160.95 Florida 146121.95
13 100671.96 91790.61 249744.55 California 144259.4
14 93863.75 127320.38 249839.44 Florida 141585.52
15 91992.39 135495.07 252664.93 California 134307.35
16 119943.24 156547.42 256512.92 Florida 132602.65
17 114523.61 122616.84 261776.23 New York 129917.04
18 78013.11 121597.55 264346.06 California 126992.93
19 94657.16 145077.58 282574.31 New York 125370.37
20 91749.16 114175.79 294919.57 Florida 124266.9
21 86419.7 153514.11 0 New York 122776.86
22 76253.86 113867.3 298664.47 California 118474.03
23 78389.47 153773.43 299737.29 New York 111313.02
24 73994.56 122782.75 303319.26 Florida 110352.25
25 67532.53 105751.03 304768.73 Florida 108733.99
26 77044.01 99281.34 140574.81 New York 108552.04
27 64664.71 139553.16 137962.62 California 107404.34
28 75328.87 144135.98 134050.07 Florida 105733.54
29 72107.6 127864.55 353183.81 New York 105008.31
30 66051.52 182645.56 118148.2 Florida 103282.38
31 65605.48 153032.06 107138.38 New York 101004.64
32 61994.48 115641.28 91131.24 Florida 99937.59
33 61136.38 152701.92 88218.23 New York 97483.56
34 63408.86 129219.61 46085.25 California 97427.84
35 55493.95 103057.49 214634.81 Florida 96778.92
36 46426.07 157693.92 210797.67 California 96712.8
37 46014.02 85047.44 205517.64 New York 96479.51
38 28663.76 127056.21 201126.82 Florida 90708.19
39 44069.95 51283.14 197029.42 California 89949.14

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.97110574
R Square 0.94304636
Adjusted R Square
0.93802104
Standard Error 7508.517
Observations 38

ANOVA
df SS MS F Significance F
Regression 3 3.1739E+10 1.058E+10 187.658912 3.228E-21
Residual 34 1916846135 56377827.5
Total 37 3.3656E+10

Coefficients Standard Error t Stat
Intercept 56651.6482 7368.1816 7.68868783
R&D Spend 0.76930441 0.04740394 16.2287033
-0.0479275 0.05047484 -0.9495332
0.02666947 0.01560237 1.709322
P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0%
6.1194E-09 41677.7016 71625.5948 41677.7016 71625.5948
1.4025E-17 0.67296802 0.8656408 0.67296802 0.8656408
0.34905055 -0.1505048 0.05464969 -0.1505048 0.05464969
0.09650525 -0.0050384 0.0583773 -0.0050384 0.0583773
Interpretation of X intercept and slopes in the regression model:
From the above analysis we can write the regression model as:
ŷ=56651 + 0.769 X1 -0.0479 X2 + 0.02667
where,
ŷ=Profit
X1= Administration spending
X2= R&D spending
X3= Marketing spending

Here we have x intercept which is equals to 56651. And 0.769, -0.0479, and
0.02667 as the slopes of each independent variables X1, X2 and X3 respectively.
As per the equation, if we increase administration spending by 1 value the profits
of the company will increase by only 0.769, keeping all other constant.
Similarly, if we increase R&D spending by 1 value then the profits of the company
will decrease by 0.0479 citers paribus.
And if we increase marketing spending by 1 rupee the profits of the company will
increase by 0.02667 rupees citers paribus.

Interpretation of R square and adjusted R square:

Because it's a multiple regression, and in multiple regression, naturally the R
square will go up as you increase the number of independent variables. So, in
multiple regression, we will focus on adjusted R square.
our adjusted R square says that about 94% of variations that we see are explained
by variables that we have identified.

Interpretation of P values:
Now focusing on the p values, any p value that shows a value greater than 0.5
(which is our level of significance) means that it does not have any strong
relationship with the Y value (i.e. profit) that we are trying to predict. statistically
not significant to reject the null hypothesis.
Here we do not have such p values whose value is greater than 0.5 hence in all
these independent variables we reject the null hypothesis which says that profit is
not affected by administration spending, R&D spending, and marketing spending
respectively; and accept the alternative which says that profits do get affected by
those spending.