2018/2019 STATISTICS FOR DECISION MAKING

A manufacturing company has three processing lines. Each

processing line combines various raw materials to produce
the same output. One of the processing lines can combine
units of input to produce units of output such that there is a
linear relationship between input and output. The Chief
Executive Officer wants the output model to be estimated
for this processing line. Given the values of input and
output (in thousands of units) in the table below, and as the
Director of Data Management, you are to:
Input 5 7 2 8 4
Output 8 12 6 14 8
(a) Determine the extent to which output changes as the input
change and interpret your result.
(b) Find the intercept of the output model and interpret it. Write
down the equation of the line of best fit for output.
(c) Determine the value of the extent of relationship between the
input and output, and interpret your result.
(d) Find the value of the coefficient of determination and interpret
your result.
(e) What will be the output level if the input usage is 15,000?
(f) What percentage of the changes in output is due to other raw
materials?
(g) Test at 1 percent significance level, whether the correlation
between input and output exist.
Solution
The estimated line of regression is given by x y x2 y2 xy
y = ˆ + ˆ x, where 5 8 25 64 40
ˆ = S xy and ˆ = y − ˆ x 7 12 49 144 84
S xx
2 6 4 36 12
2
 x = 26,  y = 48,  x = 158, 8 14 64 196 112
2 4 8 16 64 32
 y = 504,  xy = 280.
26 48 158 504 280
x = n = 26  y = 48 = 9.6
x
5
= 5 .2 , y = n 5

S xx =  x 2 −
(  x ) 2
= 158 −
26 2
= 22.8.
n 5
2
S yy =  y −
(  y ) 2
= 504 −
482
= 43.2.
n 5
S xy =  xy −
(  x )(  y )
= 280 −
(26)(48)
= 30.4.
n 5
 S
ˆ = S xy = 30.4
22.8
= 1.3333
xx
ˆ = y − ˆ x = 9.6 − 1.3333  5.2 = 2.6667.
Alternative Computation
The estimated line of regression is given by y = ˆ + ˆ x, where
ˆ = 
( x − x )( y − y )
and ˆ = y − ˆ x
(x − x ) 2

2 2
x y x−x ( x − x ) y − y ( y − y ) ( x − x )( y − y )
5 8 -0.2 0.04 -1.6 2.56 0.320
7 12 1.8 3.24 2.4 5.76 4.320
2 6 -3.2 10.24 -3.6 12.96 11.520
8 14 2.8 7.84 4.4 19.36 12.320
4 8 -1.2 1.44 -1.6 2.56 1.920
26 48 22.80 43.20 30.400
 ˆ = S xy =  ( x − x )( y − y ) = 30.4 = 1.333
S xx  ( x − x )2 22.8

ˆ = y − ˆ x = 9.6 − 1.333  5.2 = 2.667.

(a) If input increases by 1 unit, output will increase by 1.333 units (or if
input increases by 1,000 unit, output will increase by 1,333 units)
(b) Since the values of input and output are in thousands of units, we
multiply the value of  by 1000. Thus,
ˆ = 2.667 1000 = 2667.
The fitted line of regression is
y = 2667 + 1.333x.
For a constant term (intercept) of 2,667 means that if there is no x the
value of y will be 2,667.
(c) The value of the extent of relationship is the estimate of
the correlation coefficient r.
S xy 30.4
r= = = 0.9686.
S xx  S yy 22.8  43.2
 ( x − x )( y − y ) 30.4
r= = = 0.9686.
 ( x − x ) 2
  ( y − y ) 2 22.8  43.2

Since r is positive, it implies that there is a positive

relationship between x and y. In order words, they move
in the same direction. A larger r, (r = 0.9686) indicate a
stronger relationship.
(d) The coefficient of determination, r2, is the square of the
correlation coefficient
r2 = (0.9686)2 = 0.9383
The coefficient of determination measures the percentage of
the total variation in y explained by the regression model. A
high r2 (r2 = 0.9383) tells us how well the simple regression
line fits the data. Thus, 0.9383 is an indication that about
93.4% of the variation in y is accounted for by x.
(e) Given that y = 2667 + 1.333x., if x = 15,000
y = 2667 + 1.333 15,000 = 22, 662
When the input is 15,000, we expect a corresponding output
of 22,662.
 Alternatively, using y = 2.667 + 1.333x.
Input is in 1000’s, so 15,000 mean that x = 15. Thus,
y = 2.667 + 1.333 15 = 22.662
Hence, when the input is 15,000, we expect a corresponding
output of 22,662.

(f) Since r2 = 0.934, it follows that the variation not due to x

2
is 1 − r = 1 − 0.9383 = 0.062 = 6.2%.
(g) The hypotheses
H 0 :  = 0 (no correlation between input x, and output, y)
H1:   0 (correlation exists)
at the 0.01 level of significance and n = 5.
Test statistic
r −
t= .
1 − r2
n − 2
When H 0 , t has the t-distribution with n – 2 degrees of
freedom.

Decision rule
Two tailed test:  = 0.01  0.01
2
= 0.005.
Degrees of freedom = 5 – 2 = 3.
Critical value: t0.005, 3 = 5.841.
We reject H 0 if t  5.841 or retain H 0 if t  5.841.
Computation
r −
t= = 0.9686 − 0 = 6.748.
1 − r2 1 − 0.96862
n − 2 5− 2

Decision
Since 6.748 > 5.841, we reject H 0 at the 0.01 level of
significance.

Interpretation
There is evidence of a linear association at the 1%
level of significance (for a two tail test).
1. If x and y are both observed in units of GH¢ 100 and suppose the predicted
regression equation is
yˆ = 4.1 + 8.5 x.
(a) Interpret the coefficients.
(b) Use the predicted equation to estimate y for value of GH¢ 1,100 in x.

Solution
(a) When there is no x (i.e. x = 0), the estimated y is 4.1 units (i.e. GH¢ 410)
and if x changes by 1 unit (i.e. GH¢ 100), the expected change in y is 8.5
units (i.e. GH¢ 850).
(b) Since x is in GH¢ 100’s, so GH¢ 1,100 mean that x = 11. Thus,
yˆ = 4.1 + 8.5(11) = 97.6.
Hence, the estimated y for x value of GH¢ 1,100 is GH¢ 9,760.
2. If y is observed in units of GH¢ 100 and suppose the predicted regression
equation is
yˆ = 4.1 + 8.5 x.
(a) Interpret the coefficients.
(b) Use the predicted equation to estimate y for value of 20 units in x.

Solution
(a) When there is no x (i.e. x = 0), the estimated y is 4.1 units (i.e. GH¢ 410)
and if x changes by 1 unit, the expected change in y is 8.5 units (i.e. GH¢
850).
(b) When x = 20,
yˆ = 4.1 + 8.5(20) = 174.1.
Hence, the estimated y for x value of 20 units is GH¢ 17,410.
3. If x is observed in units of GH¢ 100 and suppose the predicted regression
equation is
yˆ = 4.1 + 8.5 x.
(a) Interpret the coefficients.
(b) Use the predicted equation to estimate y for value of GH¢ 2,200 in x.

Solution
(a) When there is no x (i.e. x = 0), the estimated y is 4.1 units and if x changes
by 1 unit (i.e. GH¢ 100), the expected change in y is 8.5 units.
(b) Since x is in GH¢ 100’s, so GH¢ 2,200 mean that x = 22. Thus,
yˆ = 4.1 + 8.5(22) = 191.1.
Hence, the estimated y for x value of GH¢ 2,200 is 191.1 units.