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Imagine that you work for a chain of auto dealerships. Your company is opening a new dealership,
and you are in charge of choosing inventory. To do this, you need to predict what product mix is
appropriate, i.e. what kind of cars your customers will buy. The first thing you need to do is
understand the relationship between people income and the amount they spend on car. To do this,
you use the technique called regression. The dataset consists of two variables: income and price. The
variable income stands for the annual income of each application and the variable price stands for
the price of the car each is buying. Both variables are measured in dollar. Use a 95% confidence level
where needed.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.675778
R Square 0.456676
Adjusted R
Square 0.451132
Standard Error 4266.858
Observations 100

ANOVA
Significance
df SS MS F F
Regression 1 1.5E+09 1.5E+09 82.37119497 1.23E-14
Residual 98 1.78E+09 18206076
Total 99 3.28E+09

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 5787.9 1572.261 3.681258 0.00037978847 2667.798 8908.001

Income 0.22754 0.025071 9.075858 0.00000000000 0.177788 0.277293

Use above information to answer the following questions.

1. Write the estimated regression equation.

Price = 5787.9 +0.22754(income)

2. In terms of statistics, does annual income have an impact on automotive prices? Explain

Null hypothesis (H0) : coefficient of income = 0 (or 𝛽1 = 0)

Alternative hypothesis (Ha): coefficient of income ≠0 (or 𝛽1 ≠ 0)

From the table above:

t-stat of income = 9.075858 and p-value associated with coefficient income is 0.0000

Since p-value < 0.05 (or 5% significant level), we reject null hypothesis stating that coefficient of
income equal to zero. There is enough evidence suggest that income impact the price.

3. Use your regression equation to estimate the mean price for a customer who has an income of
$80,000 per year.

Price = 5787.9 +0.22754(80000) = 23,991.1

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3. Determine the proportion of the variation in price that would be explained by its relationship to
income.

R-Squared (R² or the coefficient of determination) is a statistical measure in a regression model that
determines the proportion of variance in the dependent variable that can be explained by the
independent variable. In other words, r-squared shows how well the data fit the regression model. In
this case, R-squared equals to 0.456676.