NURA Managerial Economics

AMANA
Lecture 4.Regression Analysis
 Specifying the Regression Equation
 The 1st thing is identification of variables.
 Data collection – both quantitative & qualitative ones.
 Quantify qualitative data.
 Then specify the likely form of the regression equation.
 There are two main forms – linear & non-linear or power function e.g. Q =
aPbAc
Finding the Critical Value,
Zα/2
Z α/2  1.96
• Consider a 95% confidence interval:
1  α  0.95so α  0.05

α α
 0.025  0.025
2 2

Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
NURA A
Limit Limit
5/2/2022
Common Levels of Confidence
• Commonly used confidence levels are 90%, 95%, and 99%

Confidence
Confidence
Coefficient, Zα/2 value
Level
1 
80% 0.80 1.28
90% 0.90 1.645
95% 0.95 1.96
98% 0.98 2.33
99% 0.99 2.58
99.8% 0.998 3.08
99.9% 0.999 3.27 NURA A

5/2/2022
 The values of the parameters are often obtained by using a
technique called regression analysis.
 Dependent variables: whose variation is to be explained

 Explanatory variables: thought to cause the dependent

variable to take on different values.
 Intercept parameter: that gives the value of Y at the point
where the regression line cross the Y-axis
 Slope parameter: is Y/X
 Estimating the regression equation
 Here the important thing is estimating the coefficients.
 Assume cost function Y = a + bx
“a” is vertical intercept and “b” is the slope or marginal cost

 
bˆ 
(X i  X)(Y 2
i  Y)

 (X i  X)
and

 
b
ΔY

Y2  Y1 aˆ  Y  bˆ X
ΔX X2  X2
 Hypothetical data on total cost & total output
Periods Cost (Yi) Output (Xi) Yi -Y Xi - X (Xi - X)2 (Yi -Y) (Xi - X)

1 100 0 -137.14 -12.29 151.04 1,685.45

2 150 5 -87.14 -7.29 53.14 635.25
3 160 8 -77.14 -4.29 18.40 330.93
4 240 10 -2.86 -2.29 5.24 -6.55
5 230 15 -7.14 2.71 7.34 -19.35
6 370 23 132.86 10.71 114.70 1,422.93
7 410 25 172.86 12.71 161.54 2,197.05
Mean 237.14 12.29

Total or  511.40 6,245.71

 Ỳ = 87.08 + 12.21X
GROUP ASSIGMENT