Statistics For Business and Economics (13e) : John Loucks

Statistics for Business and Economics (13e)
Statistics for
Slides by
Johnand Economics (13e)

Business
Loucks
Anderson, Sweeney, Williams, Camm, Cochran
St. Edward’s
© 2017 Cengage Learning
University
Slides by John Loucks

St. Edwards University
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 1
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Chapter 14, Part A: Simple Linear Regression

• Simple Linear Regression Model
• Least Squares Method
• Coefficient of Determination
• Model Assumptions
• Testing for Significance
Simple Linear Regression

• Managerial decisions often are based on the relationship between two or
more variables.
• Regression analysis can be used to develop an equation showing how the
variables are related.
• The variable being predicted is called the dependent variable and is denoted
by y.
• The variables being used to predict the value of the dependent variable are
called the independent variables and are denoted by x.

• Simple linear regression involves one independent variable and one
dependent variable.
• The relationship between the two variables is approximated by a
straight line.
• Regression analysis involving two or more independent variables is
called multiple regression.
Simple Linear Regression Model

• The equation that describes how y is related to x and an error term is called
the regression model.
• The simple linear regression model is:
y = 0 +  1x + 
where:
0 and 1 are called parameters of the model.
 is a random variable called the error term.
Simple Linear Regression Equation

• The simple linear regression equation is:
E(y) = 0 + 1x
• Graph of the regression equation is a straight line.

• 0 is the y intercept of the regression line.
• 1 is the slope of the regression line.
• E(y) is the expected value of y for a given x value.

• Positive Linear Relationship
E(y) E(y) = 0 + 1x
Regression line
Intercept Slope 1
0 is positive

• Negative Linear Relationship
E(y) E(y) = 0 - 1x
Intercept
0 Regression line
Slope 1
is negative

• No Relationship
E(y)
Intercept Regression line

0
Slope 1
is 0
Estimated Simple Linear Regression Equation

• The estimated simple linear regression equation
𝑦ො = 𝑏0 + 𝑏1 𝑥
E(y) = 0 + 1x
➢ The parameter values are

• The graph is called the estimated regression line.
unknown and must be
• b0 is the y intercept of the line. estimated using sample
• b1 is the slope of the line. data.
• 𝑦ො is the estimated value of y for a given x value. ➢ Therefore, sample statistics
𝑏0 + 𝑏1 are computed as
estimates of the
population parameters.
Estimation Process
1. Regression Model 2. Sample Data:
y =  0 +  1x + x y
Regression Equation x1 y1
E(y) =  0 +  1x . .
Unknown Parameters . .
 0,  1 xn yn
4. 3.
Estimated
b0 and b1 Regression Equation
provide estimates of 𝑦ො = 𝑏0 + 𝑏1 𝑥
 0 and  1 Sample Statistics
b0, b1
Least Squares Method

• Least Squares Criterion
min σ(𝑦𝑖 − 𝑦ො𝑖 )2
where:
yi = observed value of the dependent variable
for the ith observation
𝑦ො𝑖 = estimated value of the dependent variable
for the ith observation

𝑦ො = 𝑏0 + 𝑏1 𝑥
• Slope for the Estimated Regression Equation
σ 𝑥𝑖 − 𝑥ҧ 𝑦𝑖 − 𝑦ത
𝑏1 =
σ 𝑥𝑖 − 𝑥ҧ 2
where:
xi = value of independent variable for ith observation
yi = value of dependent variable for ith observation
𝑥ҧ = mean value for independent variable
𝑦ത = mean value for dependent variable

𝑦ො = 𝑏0 + 𝑏1 𝑥
• y-Intercept for the Estimated Regression Equation
𝑏0 = 𝑦ത − 𝑏1 𝑥ҧ

• Example: Reed Auto Sales
Reed Auto periodically has Number of Number of

a special week-long sale. As TV Ads (x) Cars Sold (y)
part of the advertising 1 14
campaign Reed runs one or 3 24
more television commercials 2 18
during the weekend 1 17
preceding the sale. Data 3 27
from a sample of 5 previous x = 10 y = 100
sales are shown in the table. 𝑥ҧ = 2 𝑦ത = 20
Estimated Regression Equation

σ 𝑥𝑖 − 𝑥ҧ 𝑦𝑖 − 𝑦ത
𝑏1 = 2 =?
σ 𝑥𝑖 − 𝑥ҧ

𝑏0 = 𝑦ത − 𝑏1 𝑥ҧ = ?
• Estimated Regression Equation

𝑦ො = 𝑏0 + 𝑏1 𝑥 = ?
Estimated Regression Equation

σ 𝑥𝑖 − 𝑥ҧ 𝑦𝑖 − 𝑦ത 20
𝑏1 = 2 = =5

𝑏0 = 𝑦ത − 𝑏1 𝑥ҧ = 20 − 5 2 = 10
• Estimated Regression Equation

𝑦ො = 10 + 5𝑥
Using Excel’s Chart Tools for

Scatter Diagram & Estimated Regression Equation
Reed Auto Sales Estimated Regression Line
30
25
Cars Sold
20
y = 5x + 10
15
10
5
0
0 1 2 3 4
TV Ads
Coefficient of Determination
• Relationship Among SST, SSR, SSE
SST = SSR + SSE
σ 𝑦𝑖 − 𝑦ത 2 = σ 𝑦ො𝑖 − 𝑦ത 2
+ σ 𝑦𝑖 − 𝑦ො𝑖 2
where:
SST = total sum of squares
SSR = sum of squares due to regression
SSE = sum of squares due to error
• The coefficient of determination is:
r2 = SSR/SST
where:
SSR = sum of squares due to regression
SST = total sum of squares
r2 = SSR/SST = 100/114 = .8772
The regression relationship is very strong; 87.72% of the variability

in the number of cars sold can be explained by the linear relationship
between the number of TV ads and the number of cars sold.
Using Excel to Compute the Coefficient of Determination

• Adding r 2 Value to Scatter Diagram
Reed Auto Sales Estimated Regression Line
30
25
Cars Sold
20
y = 5x + 10
15
R2 = 0.8772
10
5
0
0 1 2 3 4
TV Ads
Sample Correlation Coefficient
𝑟𝑥𝑦 = (sign of 𝑏1 ) Coefficient of Determination

𝑟𝑥𝑦 = (sign of 𝑏1) 𝑟 2
where:
b1 = the slope of the estimated regression
equation 𝑦ො = 𝑏0 + 𝑏1 𝑥
Sample Correlation Coefficient
𝑟𝑥𝑦 = (sign of 𝑏1) 𝑟 2
The sign of b1 in the equation 𝑦ො = 10 + 5x is "+".
𝑟𝑥𝑦 = + .8772
rxy = +.9366
Assumptions About the Error Term 

1. The error  is a random variable with mean of zero.
2. The variance of  , denoted by  2, is the same for all values of the
independent variable.
3. The values of  are independent.
4. The error  is a normally distributed random variable.
Testing for Significance

• To test for a significant regression relationship, we must conduct a
hypothesis test to determine whether the value of 1 is zero.
• Two tests are commonly used:
t Test and F Test
• Both the t test and F test require an estimate of  2, the variance of  in the
regression model.

• An Estimate of  2
The mean square error (MSE) provides the estimate of  2, and the notation
s2 is also used.
s 2 = MSE = SSE/(n - 2)
where:
2 2
SSE=σ 𝑦𝑖 − 𝑦ො𝑖 = σ 𝑦𝑖 − 𝑏0 − 𝑏1 𝑥𝑖

• An Estimate of 
• To estimate , we take the square root of s2.
• The resulting s is called the standard error of the estimate.
SSE
s = MSE =
𝑛−2
Testing for Significance: t Test

• Hypotheses
H0 :  1 = 0
Ha: 1 ≠ 0
• Test Statistic
𝑏1 where 𝑠
𝑡= 𝑠𝑏1 =
𝑠𝑏1 σ 𝑥𝑖 − 𝑥ҧ 2

• Rejection Rule
Reject H0 if p-value < 

or t < -t  or t > t 
where:
t is based on a t distribution
with n - 2 degrees of freedom

1. Determine the hypotheses. H0 :  1 = 0
Ha: 1 ≠ 0
2. Specify the level of significance.  = .05
𝑏1
3. Select the test statistic. 𝑡=
𝑠𝑏1
4. State the rejection rule. Reject H0 if p-value < .05

OR
t > 3.182 (with 3 degrees of freedom)

𝑏1 5
5. Compute the value of the test statistic. 𝑡=𝑠 = 1.08 = 4.63
𝑏1
6. Determine whether to reject H0. t = 4.541 provides an area of .01

in the upper tail. Hence, the p-
value is less than .02. (Also,
t = 4.63 > 3.182.) We can reject
H0 .
𝑠
𝑠𝑏1 =
Confidence Interval for  1

• We can use a 95% confidence interval for 1 to test the hypotheses just used in
the t test.
• H0 is rejected if the hypothesized value of 1 is not included in the confidence
interval for 1.

• The form of a confidence interval for 1 is:
𝑏1 ± 𝑡𝞪/2𝑠𝑏1
where
b1 is the point estimator,
𝑡𝞪/2 𝑠𝑏1 is the margin of error, and
ta/2 is the t value providing an area of
/2 in the upper tail of a t distribution
with n - 2 degrees of freedom

• Rejection Rule
Reject H0 if 0 is not included in the confidence interval for 1.
• 95% Confidence Interval for 1

𝑏1 ± 𝑡𝞪/2𝑠𝑏1 = 5 +/- 3.182(1.08) = 5 +/- 3.44 or 1.56 to 8.44
• Conclusion
0 is not included in the confidence interval. Reject H0
Testing for Significance: F Test

• Hypotheses
H0: b1 = 0
Ha: b1 ≠ 0
• Test Statistic
F = MSR/MSE

• Rejection Rule
Reject H0 if
p-value < 
or F > F
where:
F is based on an F distribution with
1 degree of freedom in the numerator and
n - 2 degrees of freedom in the denominator

1. Determine the hypotheses. H0: b1 = 0
Ha: b1 ≠ 0
2. Specify the level of significance.  = .05
3. Select the test statistic. F = MSR/MSE
4. State the rejection rule. Reject H0 if p-value < .05 or

F > 10.13 (with 1 d.f. in
numerator and 3 d.f. in
denominator)

5. Compute the value of the test statistic.
F = MSR/MSE = 100/4.667 = 21.43
6. Determine whether to reject H0.
F = 17.44 provides an area of .025 in the upper tail. Thus, the p-value
corresponding to F = 21.43 is less than .025. Hence, we reject H0.
The statistical evidence is sufficient to conclude that we have a significant
relationship between the number of TV ads aired and the number of cars
sold.
Some Cautions about the

Interpretation of Significance Tests
• Rejecting H0: 1 = 0 and concluding that the relationship between x and y
is significant does not enable us to conclude that a cause-and-effect
relationship is present between x and y.
• Just because we are able to reject H0: 1 = 0 and demonstrate statistical

significance does not enable us to conclude that there is a linear relationship
between x and y.
End of Chapter 14, Part A

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Statistics for Business and Economics (13e)

Johnand Economics (13e)

Slides by John Loucks

Chapter 14, Part A: Simple Linear Regression

Simple Linear Regression

Simple Linear Regression

Simple Linear Regression Model

Simple Linear Regression Equation

• Graph of the regression equation is a straight line.

Simple Linear Regression Equation

E(y) E(y) = 0 + 1x

Simple Linear Regression Equation

E(y) E(y) = 0 - 1x

Simple Linear Regression Equation

Intercept Regression line

Estimated Simple Linear Regression Equation

➢ The parameter values are

Least Squares Method

min σ(𝑦𝑖 − 𝑦ො𝑖 )2

Least Squares Method

Least Squares Method

Simple Linear Regression

Reed Auto periodically has Number of Number of

Estimated Regression Equation

• y-Intercept for the Estimated Regression Equation

• Estimated Regression Equation

Estimated Regression Equation

• y-Intercept for the Estimated Regression Equation

• Estimated Regression Equation

Using Excel’s Chart Tools for

SST = SSR + SSE

The regression relationship is very strong; 87.72% of the variability

Using Excel to Compute the Coefficient of Determination

Sample Correlation Coefficient

𝑟𝑥𝑦 = (sign of 𝑏1 ) Coefficient of Determination

Sample Correlation Coefficient

𝑟𝑥𝑦 = (sign of 𝑏1) 𝑟 2

The sign of b1 in the equation 𝑦ො = 10 + 5x is "+".

Assumptions About the Error Term 

Testing for Significance

t Test and F Test

Testing for Significance

Testing for Significance

Testing for Significance: t Test

Testing for Significance: t Test

Reject H0 if p-value < 

Testing for Significance: t Test

2. Specify the level of significance.  = .05

4. State the rejection rule. Reject H0 if p-value < .05

Testing for Significance: t Test

6. Determine whether to reject H0. t = 4.541 provides an area of .01

Confidence Interval for  1

Confidence Interval for  1

Confidence Interval for  1

Reject H0 if 0 is not included in the confidence interval for 1.

• 95% Confidence Interval for 1

Testing for Significance: F Test

Testing for Significance: F Test

Testing for Significance: F Test

2. Specify the level of significance.  = .05

3. Select the test statistic. F = MSR/MSE

4. State the rejection rule. Reject H0 if p-value < .05 or