10 - 1 © 2001 Prentice-Hall, Inc. Statistics for Business and Economics Simple Linear Regression...

10 - 10 - 11

© 2001 Prentice-Hall, Inc.© 2001 Prentice-Hall, Inc.

Statistics for Business Statistics for Business and Economicsand Economics

Simple Linear Regression Simple Linear Regression Chapter 10Chapter 10

10 - 10 - 22


Learning ObjectivesLearning Objectives

1.1. Describe the Linear Regression ModelDescribe the Linear Regression Model

2.2. State the Regression Modeling StepsState the Regression Modeling Steps

3.3. Explain Ordinary Least SquaresExplain Ordinary Least Squares

4.4. Compute Regression CoefficientsCompute Regression Coefficients

5.5. Predict Response VariablePredict Response Variable

6.6. Interpret Computer OutputInterpret Computer Output

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ModelsModels

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ModelsModels

1.1. Representation of Some PhenomenonRepresentation of Some Phenomenon

2.2. Mathematical Model Is a Mathematical Mathematical Model Is a Mathematical Expression of Some PhenomenonExpression of Some Phenomenon

3.3. Often Describe Relationships between Often Describe Relationships between VariablesVariables

4.4. TypesTypes Deterministic ModelsDeterministic Models Probabilistic ModelsProbabilistic Models

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Deterministic Deterministic ModelsModels

1.1. Hypothesize Exact RelationshipsHypothesize Exact Relationships

2.2. Suitable When Prediction Error is Suitable When Prediction Error is NegligibleNegligible

3.3. Example: Force Is Exactly Example: Force Is Exactly Mass Times AccelerationMass Times Acceleration FF = = mm··aa

© 1984-1994 T/Maker Co.

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Probabilistic ModelsProbabilistic Models

1.1. Hypothesize 2 ComponentsHypothesize 2 Components DeterministicDeterministic Random ErrorRandom Error

2.2. Example: Sales Volume Is 10 Times Example: Sales Volume Is 10 Times Advertising Spending + Random ErrorAdvertising Spending + Random Error YY = 10 = 10X X + + Random Error May Be Due to Factors Random Error May Be Due to Factors

Other Than AdvertisingOther Than Advertising

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Types of Types of Probabilistic ModelsProbabilistic Models

ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

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Regression ModelsRegression Models

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ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

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Regression ModelsRegression Models

1.1. Answer ‘What Is the Relationship Answer ‘What Is the Relationship Between the Variables?’Between the Variables?’

2.2. Equation UsedEquation Used 1 Numerical Dependent (Response) Variable1 Numerical Dependent (Response) Variable

What Is to Be PredictedWhat Is to Be Predicted 1 or More Numerical or Categorical 1 or More Numerical or Categorical

Independent (Explanatory) VariablesIndependent (Explanatory) Variables

3.3. Used Mainly for Prediction & EstimationUsed Mainly for Prediction & Estimation

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Regression Modeling Regression Modeling Steps Steps

1.1. Hypothesize Deterministic ComponentHypothesize Deterministic Component

2.2. Estimate Unknown Model ParametersEstimate Unknown Model Parameters

3.3. Specify Probability Distribution of Specify Probability Distribution of Random Error TermRandom Error Term Estimate Standard Deviation of ErrorEstimate Standard Deviation of Error

4.4. Evaluate ModelEvaluate Model

5.5. Use Model for Prediction & Estimation Use Model for Prediction & Estimation

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Model SpecificationModel Specification

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3.3. Specify Probability Distribution of Random Specify Probability Distribution of Random Error TermError Term Estimate Standard Deviation of ErrorEstimate Standard Deviation of Error



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Specifying the Specifying the ModelModel

1.1. Define VariablesDefine Variables Conceptual (e.g., Advertising, Price)Conceptual (e.g., Advertising, Price) Empirical (e.g., List Price, Regular Price) Empirical (e.g., List Price, Regular Price) Measurement (e.g., $, Units)Measurement (e.g., $, Units)

2.2. Hypothesize Nature of RelationshipHypothesize Nature of Relationship Expected Effects (i.e., Coefficients’ Signs)Expected Effects (i.e., Coefficients’ Signs) Functional Form (Linear or Non-Linear)Functional Form (Linear or Non-Linear) InteractionsInteractions

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Model Specification Model Specification Is Based on TheoryIs Based on Theory

1.1. Theory of Field (e.g., Sociology)Theory of Field (e.g., Sociology)

2.2. Mathematical TheoryMathematical Theory

3.3. Previous ResearchPrevious Research

4.4. ‘Common Sense’‘Common Sense’

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Advertising

Sales

Advertising

Sales

Advertising

Sales

Advertising

Sales

Advertising

Sales

Advertising

Sales

Advertising

Sales

Advertising

Sales

Thinking Challenge: Thinking Challenge: Which Is More Which Is More

Logical?Logical?

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Types of Types of Regression ModelsRegression Models

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RegressionModels

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RegressionModels

Simple

1 Explanatory1 ExplanatoryVariableVariable

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RegressionModels

2+ Explanatory2+ ExplanatoryVariablesVariables

Simple Multiple


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RegressionModels

Linear


Simple Multiple


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RegressionModels

LinearNon-

Linear


Simple Multiple


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RegressionModels

LinearNon-

Linear


Simple Multiple

Linear


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RegressionModels

LinearNon-

Linear


Simple Multiple

Linear


Non-Linear

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Linear Regression Linear Regression ModelModel

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RegressionModels

LinearNon-

Linear

2+ ExplanatoryVariables

Simple

Non-Linear

Multiple

Linear

1 ExplanatoryVariable

RegressionModels

LinearNon-

Linear

2+ ExplanatoryVariables

Simple

Non-Linear

Multiple

Linear

1 ExplanatoryVariable

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Y

Y = m X + b

b = Y -in te rce pt

X

C ha ng ein Y

C ha ng e in X

m = S lo pe

Linear EquationsLinear Equations

High School TeacherHigh School Teacher© 1984-1994 T/Maker Co.

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YY XXii ii ii 00 11

Linear Regression Linear Regression ModelModel

1.1. Relationship Between Variables Is a Relationship Between Variables Is a Linear FunctionLinear Function

Dependent Dependent (Response) (Response) VariableVariable

Independent Independent (Explanatory) (Explanatory) VariableVariable

Population Population SlopeSlope

Population Population Y-InterceptY-Intercept

Random Random ErrorError

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Population & Population & Sample Regression Sample Regression

ModelsModels

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ModelsModels

PopulationPopulation

$ $

$

$

$

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ModelsModels

Unknown Relationship

PopulationPopulation

Y Xi i i 0 1

$

$

$

$ $

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ModelsModels


PopulationPopulation Random SampleRandom Sample

Y Xi i i 0 1

$ $$

$

$ $$

$$ $$

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ModelsModels


PopulationPopulation Random SampleRandom Sample

Y Xi i i 0 1

Y Xi i i 0 1Y Xi i i 0 1

$ $$

$

$ $$

$$ $$

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Y

X

Y

X

Population Linear Population Linear Regression ModelRegression Model


iXYE 10 iXYE 10

ObservedObservedvaluevalue

Observed valueObserved value

ii = Random error= Random error

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Y

X

Y

X


Sample Linear Sample Linear Regression ModelRegression Model

Y Xi i 0 1 Y Xi i 0 1

Unsampled Unsampled observationobservation

ii = Random = Random

errorerror

Observed valueObserved value

^

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Estimating Parameters:Estimating Parameters:Least Squares MethodLeast Squares Method

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5.5. Use Model for Prediction & EstimationUse Model for Prediction & Estimation

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0204060

0 20 40 60

X

Y

ScattergramScattergram

1.1. Plot of All (Plot of All (XXii, , YYii) Pairs) Pairs

2.2. Suggests How Well Model Will FitSuggests How Well Model Will Fit

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0204060

0 20 40 60

X

Y

Thinking ChallengeThinking Challenge

How would you draw a line through the How would you draw a line through the points? How do you determine which line points? How do you determine which line ‘fits best’?‘fits best’?

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0204060

0 20 40 60

X

Y



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0204060

0 20 40 60

X

Y



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0204060

0 20 40 60

X

Y



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0204060

0 20 40 60

X

Y



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0204060

0 20 40 60

X

Y



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0204060

0 20 40 60

X

Y



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Least SquaresLeast Squares

1.1. ‘Best Fit’ Means Difference Between ‘Best Fit’ Means Difference Between Actual Y Values & Predicted Y Values Actual Y Values & Predicted Y Values Are a MinimumAre a Minimum ButBut Positive Differences Off-Set Negative Positive Differences Off-Set Negative

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1.1. ‘Best Fit’ Means Difference Between ‘Best Fit’ Means Difference Between Actual Y Values & Predicted Y Values Actual Y Values & Predicted Y Values Are a MinimumAre a Minimum ButBut Positive Differences Off-Set Negative Positive Differences Off-Set Negative

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1.1. ‘Best Fit’ Means Difference Between ‘Best Fit’ Means Difference Between Actual Y Values & Predicted Y Values Are Actual Y Values & Predicted Y Values Are a Minimuma Minimum ButBut Positive Differences Off-Set Negative Positive Differences Off-Set Negative

2.2. LS Minimizes the Sum of the Squared LS Minimizes the Sum of the Squared Differences (SSE)Differences (SSE)

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Least Squares Least Squares GraphicallyGraphically

2

Y

X

1 3

4

^^

^2

Y

X

1 3

4

^^

^^

Y X2 0 1 2 2 Y X2 0 1 2 2

Y Xi i 0 1 Y Xi i 0 1

LS minimizes ii

n2

112

22

32

42

LS minimizes ii

n2

112

22

32

42

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Coefficient Coefficient EquationsEquations

Sample SlopeSample Slope

Sample Y-interceptSample Y-intercept

Y Xi i 0 1 Y Xi i 0 1

Prediction EquationPrediction Equation

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Computation TableComputation Table

Xi Yi Xi2 Yi

2 XiYi

X1 Y1 X12 Y1

2 X1Y1

X2 Y2 X22 Y2

2 X2Y2

: : : : :

Xn Yn Xn2 Yn

2 XnYn

XiYi

Xi2 Yi

2 XiYi

Xi Yi Xi2 Yi

2 XiYi

X1 Y1 X12 Y1

2 X1Y1

X2 Y2 X22 Y2

2 X2Y2

: : : : :

Xn Yn Xn2 Yn

2 XnYn

XiYi

Xi2 Yi

2 XiYi

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Interpretation of Interpretation of CoefficientsCoefficients

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1.1. Slope (Slope (11)) Estimated Estimated YY Changes by Changes by 11 for Each 1 for Each 1

Unit Increase in Unit Increase in XX If If 11 = 2, then Sales ( = 2, then Sales (YY) Is Expected to ) Is Expected to

Increase by 2 for Each 1 Unit Increase in Increase by 2 for Each 1 Unit Increase in Advertising (Advertising (XX))

^

^

^

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1.1. Slope (Slope (11)) Estimated Estimated YY Changes by Changes by 11 for Each 1 Unit for Each 1 Unit

Increase in Increase in XX If If 11 = 2, then Sales ( = 2, then Sales (YY) Is Expected to Increase by ) Is Expected to Increase by

2 for Each 1 Unit Increase in Advertising (2 for Each 1 Unit Increase in Advertising (XX))

2.2. Y-Intercept (Y-Intercept (00)) Average Value of Average Value of YY When When XX = 0 = 0

If If 00 = 4, then Average Sales ( = 4, then Average Sales (YY) Is Expected to Be ) Is Expected to Be

4 When Advertising (4 When Advertising (XX) Is 0) Is 0

^

^

^

^

^

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Parameter Parameter Estimation ExampleEstimation Example

You’re a marketing analyst for Hasbro Toys. You’re a marketing analyst for Hasbro Toys. You gather the following data:You gather the following data:

Ad $Ad $ Sales (Units)Sales (Units)11 1122 1133 2244 2255 44

What is the What is the relationshiprelationship between sales & advertising?between sales & advertising?

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0

1

2

3

4

0 1 2 3 4 5

Scattergram Scattergram Sales vs. AdvertisingSales vs. Advertising

Sales

Advertising

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Parameter Parameter Estimation Solution Estimation Solution

TableTableXi Yi Xi

2 Yi2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

Xi Yi Xi2 Yi

2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

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Parameter Parameter Estimation SolutionEstimation Solution

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Coefficient Coefficient Interpretation Interpretation

SolutionSolution

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SolutionSolution1.1. Slope (Slope (11))

Sales Volume (Sales Volume (YY) Is Expected to Increase ) Is Expected to Increase by .7 Units for Each $1 Increase in by .7 Units for Each $1 Increase in Advertising (Advertising (XX))

^

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SolutionSolution1.1. Slope (Slope (11))

Sales Volume (Sales Volume (YY) Is Expected to Increase ) Is Expected to Increase by .7 Units for Each $1 Increase in Advertising by .7 Units for Each $1 Increase in Advertising ((XX))

2.2. Y-Intercept (Y-Intercept (00)) Average Value of Sales Volume (Average Value of Sales Volume (YY) Is ) Is

-.10 Units When Advertising (-.10 Units When Advertising (XX) Is 0) Is 0 Difficult to Explain to Marketing ManagerDifficult to Explain to Marketing Manager Expect Some Sales Without AdvertisingExpect Some Sales Without Advertising

^

^

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Parameter EstimatesParameter Estimates

ParameterParameter Standard T for H0: Standard T for H0:

VariableVariable DF DF EstimateEstimate Error Param=0 Prob>|T| Error Param=0 Prob>|T|

INTERCEPINTERCEP 1 1 -0.1000-0.1000 0.6350 -0.157 0.8849 0.6350 -0.157 0.8849

ADVERTADVERT 1 1 0.70000.7000 0.1914 3.656 0.0354 0.1914 3.656 0.0354

Parameter Parameter Estimation Computer Estimation Computer

OutputOutput

0^ 1

^

k^

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Parameter Parameter Estimation Thinking Estimation Thinking

ChallengeChallengeYou’re an economist for the county You’re an economist for the county cooperative. You gather the following data:cooperative. You gather the following data:

Fertilizer (lb.)Fertilizer (lb.) Yield (lb.)Yield (lb.) 4 4 3.03.0 6 6 5.55.51010 6.56.51212 9.09.0

What is the What is the relationshiprelationship between fertilizer & crop yield?between fertilizer & crop yield?

© 1984-1994 T/Maker Co.

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02468

10

0 5 10 15

02468

10

0 5 10 15

Scattergram Scattergram Crop Yield vs. Crop Yield vs.

Fertilizer*Fertilizer*

Yield (lb.)Yield (lb.)Yield (lb.)Yield (lb.)

Fertilizer (lb.)Fertilizer (lb.)Fertilizer (lb.)Fertilizer (lb.)

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Parameter Parameter Estimation Solution Estimation Solution

Table*Table*

Xi Yi Xi2 Yi

2 XiYi

4 3.0 16 9.00 12

6 5.5 36 30.25 33

10 6.5 100 42.25 65

12 9.0 144 81.00 108

32 24.0 296 162.50 218

Xi Yi Xi2 Yi

2 XiYi

4 3.0 16 9.00 12

6 5.5 36 30.25 33

10 6.5 100 42.25 65

12 9.0 144 81.00 108

32 24.0 296 162.50 218

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Parameter Parameter Estimation Solution*Estimation Solution*

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Solution*Solution*

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Solution*Solution*

1.1. Slope (Slope (11)) Crop Yield (Crop Yield (YY) Is Expected to Increase ) Is Expected to Increase

by .65 lb. for Each 1 lb. Increase in Fertilizer by .65 lb. for Each 1 lb. Increase in Fertilizer ((XX))

^

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Solution*Solution*

1.1. Slope (Slope (11)) Crop Yield (Crop Yield (YY) Is Expected to Increase ) Is Expected to Increase

by .65 lb. for Each 1 lb. Increase in Fertilizer by .65 lb. for Each 1 lb. Increase in Fertilizer ((XX))

2.2. Y-Intercept (Y-Intercept (00)) Average Crop Yield (Average Crop Yield (YY) Is Expected to Be ) Is Expected to Be

0.8 lb. When No Fertilizer (0.8 lb. When No Fertilizer (XX) Is Used) Is Used

^

^

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Probability Distribution Probability Distribution

of Random Errorof Random Error

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Linear Regression Linear Regression Assumptions Assumptions

1.1. Mean of Probability Distribution of Error Mean of Probability Distribution of Error Is 0Is 0

2.2. Probability Distribution of Error Has Probability Distribution of Error Has Constant VarianceConstant Variance

3.3. Probability Distribution of Error is Probability Distribution of Error is NormalNormal

4.4. Errors Are Independent Errors Are Independent

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Error Error Probability Probability DistributionDistribution

Y

f()

X

X 1X 2

Y

f()

X

X 1X 2

^

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Random Error Random Error VariationVariation

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1.1. Variation of Actual Variation of Actual YY from Predicted from Predicted YY

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2.2. Measured by Standard Error of Measured by Standard Error of Regression ModelRegression Model Sample Standard Deviation of Sample Standard Deviation of , , ss^

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2.2. Measured by Standard Error of Measured by Standard Error of Regression ModelRegression Model Sample Standard Deviation of Sample Standard Deviation of , , ss

3. 3. Affects Several FactorsAffects Several Factors Parameter SignificanceParameter Significance Prediction AccuracyPrediction Accuracy

^

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Measures of Measures of Variation Variation

in Regression in Regression 1.1. Total Sum of Squares (SSTotal Sum of Squares (SSyyyy))

Measures Variation of Observed Measures Variation of Observed YYii Around Around

the Meanthe MeanYY

2.2. Explained Variation (SSR)Explained Variation (SSR) Variation Due to Relationship Between Variation Due to Relationship Between

XX & & YY

3.3. Unexplained VariationUnexplained Variation (SSE) (SSE) Variation Due to Other FactorsVariation Due to Other Factors

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Y

X

Y

X i

Y

X

Y

X i

Variation MeasuresVariation Measures

Y Xi i 0 1 Y Xi i 0 1

Total sum Total sum

of squares of squares

(Y(Yii - -Y)Y)22

Unexplained sum Unexplained sum

of squares (Yof squares (Yii - -

YYii))22

^

Explained sum of Explained sum of

squares (Ysquares (Yii - -Y)Y)22 ^

YYii

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1.1. ProportionProportion of Variation ‘Explained’ by of Variation ‘Explained’ by Relationship Between Relationship Between XX & & YY

Coefficient of Coefficient of DeterminationDetermination

0 r2 1

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Y

X

Y

X

Y

X

Coefficient of Coefficient of Determination Determination

ExamplesExamplesY

X

r2 = 1 r2 = 1

r2 = .8 r2 = 0

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Coefficient of Coefficient of Determination Determination

ExampleExampleYou’re a marketing analyst for Hasbro You’re a marketing analyst for Hasbro

Toys. You find Toys. You find 00 = -0.1 & = -0.1 & 11 = 0.7. = 0.7.


Interpret a Interpret a coefficient of coefficient of determination determination ofof 0.8167.0.8167.

^^

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r r 22 Computer Output Computer Output

Root MSE 0.60553Root MSE 0.60553 R-square 0.8167R-square 0.8167

Dep Mean 2.00000 Dep Mean 2.00000 Adj R-sq 0.7556Adj R-sq 0.7556

C.V. 30.27650 C.V. 30.27650

r2 adjusted for number of explanatory variables & sample size

S

r2

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Evaluating the ModelEvaluating the Model

Testing for SignificanceTesting for Significance

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5.5. Use Model for Prediction & EstimationUse Model for Prediction & Estimation

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Test of Slope Test of Slope CoefficientCoefficient

1.1. Shows If There Is a Linear Relationship Shows If There Is a Linear Relationship Between Between XX & & YY

2.2. Involves Population Slope Involves Population Slope 11

3.3. Hypotheses Hypotheses HH00: : 1 1 = 0 (No Linear Relationship) = 0 (No Linear Relationship)

HHaa: : 11 0 (Linear Relationship) 0 (Linear Relationship)

4.4. Theoretical Basis Is Sampling Distribution Theoretical Basis Is Sampling Distribution of Slopeof Slope

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Sampling Sampling Distribution Distribution

of Sample Slopesof Sample Slopes

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Y

Population LineX

Sample 1 Line

Sample 2 Line

Y

Population LineX

Sample 1 Line

Sample 2 Line



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Y

Population LineX

Sample 1 Line

Sample 2 Line

Y

Population LineX

Sample 1 Line

Sample 2 Line



All Possible All Possible Sample SlopesSample Slopes

Sample 1:Sample 1: 2.52.5

Sample 2:Sample 2: 1.6 1.6


Sample 4:Sample 4: 2.12.1 : : : :Very large number of Very large number of sample slopessample slopes

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Y

Population LineX

Sample 1 Line

Sample 2 Line

Y

Population LineX

Sample 1 Line

Sample 2 Line



11

All Possible All Possible Sample SlopesSample Slopes


Sample 2:Sample 2: 1.6 1.6


Sample 4:Sample 4: 2.12.1 : : : :Very large number of Very large number of sample slopessample slopes

Sampling DistributionSampling Distribution

11

11SS

^

^

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Slope Coefficient Slope Coefficient Test StatisticTest Statistic

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Test of Slope Test of Slope Coefficient ExampleCoefficient Example

You’re a marketing analyst for Hasbro Toys. You’re a marketing analyst for Hasbro Toys. You find You find bb00 = -.1 = -.1,, bb11 = .7 = .7 & & ss = .60553= .60553..


Is the relationship Is the relationship significantsignificant at the at the .05.05 level? level?

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Solution TableSolution Table

Xi Yi Xi2 Yi

2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

Xi Yi Xi2 Yi

2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

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Test of Slope Test of Slope Parameter Parameter

SolutionSolutionHH00: : 11 = 0 = 0

HHaa: : 11 0 0

.05.05

df df 5 - 2 = 35 - 2 = 3

Critical Value(s):Critical Value(s):

Test Statistic: Test Statistic:

Decision:Decision:

Conclusion:Conclusion:

t0 3.1824-3.1824

.025

R e ject R e ject

.025

t0 3.1824-3.1824

.025

R e ject R e ject

.025

tS

.

..

1 1

1

0 70 00 1915

3 656tS

.

..

1 1

1

0 70 00 1915

3 656

Reject at Reject at = .05 = .05

There is evidence of a There is evidence of a relationshiprelationship

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Test StatisticTest StatisticSolutionSolution

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Test of Slope Test of Slope ParameterParameter

Computer OutputComputer Output Parameter EstimatesParameter Estimates

Parameter Standard Parameter Standard T for H0:T for H0:

VariableVariable DF Estimate Error DF Estimate Error Param=0 Prob>|T|Param=0 Prob>|T|

INTERCEP 1 -0.1000 0.6350 -0.157 0.8849INTERCEP 1 -0.1000 0.6350 -0.157 0.8849

ADVERTADVERT 1 0.7000 0.1914 1 0.7000 0.1914 3.6563.656 0.03540.0354

t = k / S

P-Value

Skk k

^^^^

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Using the Model for Using the Model for Prediction & EstimationPrediction & Estimation

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Prediction With Prediction With Regression ModelsRegression Models

1.1. Types of PredictionsTypes of Predictions Point EstimatesPoint Estimates Interval EstimatesInterval Estimates

2.2. What Is PredictedWhat Is Predicted Population Mean Response Population Mean Response EE((YY) for ) for

Given Given XX Point on Population Regression LinePoint on Population Regression Line

Individual Response (Individual Response (YYii) for Given ) for Given XX

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What Is PredictedWhat Is Predicted

M e an Y , E (Y )

YY Ind ivid ual

P red ic tio n , Y

E (Y ) = 0 + 1X

^

XXP

M e an Y , E (Y )

YY Ind ivid ual

P red ic tio n , Y

E (Y ) = 0 + 1X

^

XXP

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ConfidenceConfidence Interval Interval Estimate of Mean Estimate of Mean YY

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Factors Affecting Factors Affecting Interval WidthInterval Width

1.1. Level of Confidence (1 - Level of Confidence (1 - )) Width Increases as Confidence IncreasesWidth Increases as Confidence Increases

2.2. Data Dispersion (Data Dispersion (ss)) Width Increases as Variation IncreasesWidth Increases as Variation Increases

3.3. Sample SizeSample Size Width Decreases as Sample Size IncreasesWidth Decreases as Sample Size Increases

4.4. Distance of Distance of XXpp from Mean from MeanXX Width Increases as Distance IncreasesWidth Increases as Distance Increases

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Why Distance from Why Distance from Mean?Mean?

Y

XX1 X2

Y_

Y

XX1 X2

Y_

Greater Greater dispersion dispersion than than XX11

XX

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ConfidenceConfidence Interval Interval Estimate ExampleEstimate Example

You’re a marketing analyst for Hasbro Toys. You’re a marketing analyst for Hasbro Toys. You find You find bb00 = -.1 = -.1,, bb11 = .7 = .7 & & ss = .60553= .60553..


Estimate the Estimate the meanmean sales when sales when advertising is advertising is $4$4 at the at the .05.05 level. level.

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Solution TableSolution Table

Xi Yi Xi2 Yi

2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

Xi Yi Xi2 Yi

2 XiYi

1 1 1 1 1

2 1 4 1 2

3 2 9 4 6

4 2 16 4 8

5 4 25 16 20

15 10 55 26 37

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ConfidenceConfidence Interval Interval Estimate SolutionEstimate Solution

XX to be predicted to be predictedXX to be predicted to be predicted

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PredictionPrediction Interval Interval of Individual of Individual

ResponseResponse

Note!Note!

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Why the Extra ‘SWhy the Extra ‘S’’??

Expected(Mean) Y

YY w e 're trying to predict

Prediction, Y

E (Y ) = 0 + 1X

^

XXP

Expected(Mean) Y

YY w e 're trying to predict

Prediction, Y

E (Y ) = 0 + 1X

^

XXP

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Interval Estimate Interval Estimate Computer OutputComputer Output

Dep Var Pred Std Err Dep Var Pred Std Err Low95% Upp95% Low95% Upp95%Low95% Upp95% Low95% Upp95%

Obs SALES Value Predict Obs SALES Value Predict Mean Mean Predict PredictMean Mean Predict Predict

1 1.000 0.600 0.469 -0.892 2.092 -1.837 3.037 1 1.000 0.600 0.469 -0.892 2.092 -1.837 3.037

2 1.000 1.300 0.332 0.244 2.355 -0.897 3.4972 1.000 1.300 0.332 0.244 2.355 -0.897 3.497

3 2.000 2.000 0.271 1.138 2.861 -0.111 4.1113 2.000 2.000 0.271 1.138 2.861 -0.111 4.111

4 2.000 4 2.000 2.700 0.332 1.644 3.755 0.502 4.897 2.700 0.332 1.644 3.755 0.502 4.897

5 4.000 3.400 0.469 1.907 4.892 0.962 5.8375 4.000 3.400 0.469 1.907 4.892 0.962 5.837

Predicted Predicted YY when when XX = 4 = 4

Confidence Confidence IntervalInterval

SSYYPrediction Prediction IntervalInterval

10 - 10 - 110110


Hyperbolic Interval Hyperbolic Interval BandsBands

X

Y

XXP

_X

Y

XXP

_

10 - 10 - 111111


Correlation ModelsCorrelation Models

10 - 10 - 112112



ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

ProbabilisticModels

RegressionModels

CorrelationModels

OtherModels

10 - 10 - 113113


Correlation ModelsCorrelation Models

1.1. Answer ‘Answer ‘How Strong How Strong Is the Linear Is the Linear Relationship Between 2 Variables?’Relationship Between 2 Variables?’

2.2. Coefficient of Correlation UsedCoefficient of Correlation Used Population Correlation Coefficient Denoted Population Correlation Coefficient Denoted

(Rho) (Rho) Values Range from -1 to +1Values Range from -1 to +1 Measures Degree of AssociationMeasures Degree of Association

3.3. Used Mainly for UnderstandingUsed Mainly for Understanding

10 - 10 - 114114


1.1. Pearson Product Moment Coefficient of Pearson Product Moment Coefficient of Correlation, Correlation, rr::

Sample Coefficient Sample Coefficient of Correlationof Correlation

10 - 10 - 115115


Coefficient of Correlation Coefficient of Correlation ValuesValues

10 - 10 - 116116



-1.0-1.0 +1.0+1.000-.5-.5 +.5+.5

10 - 10 - 117117



-1.0-1.0 +1.0+1.000-.5-.5 +.5+.5

No No CorrelationCorrelation

10 - 10 - 118118



-1.0-1.0 +1.0+1.000

Increasing degree of Increasing degree of negative correlationnegative correlation

-.5-.5 +.5+.5

No No CorrelationCorrelation

10 - 10 - 119119



-1.0-1.0 +1.0+1.000-.5-.5 +.5+.5

Perfect Perfect Negative Negative

CorrelationCorrelationNo No

CorrelationCorrelation

10 - 10 - 120120



-1.0-1.0 +1.0+1.000-.5-.5 +.5+.5




Increasing degree of Increasing degree of positive correlationpositive correlation

10 - 10 - 121121



-1.0-1.0 +1.0+1.000

Perfect Perfect Positive Positive


-.5-.5 +.5+.5




10 - 10 - 122122


Coefficient of Coefficient of CorrelationCorrelation ExamplesExamples

Y

X

Y

X

Y

X

Y

X

r = 1 r = -1

r = .89 r = 0

10 - 10 - 123123


Test of Test of Coefficient of Coefficient of Correlation Correlation

1.1. Shows If There Is a Linear Relationship Shows If There Is a Linear Relationship Between 2 Numerical VariablesBetween 2 Numerical Variables

2.2. Same Conclusion as Testing Same Conclusion as Testing Population Slope Population Slope 11

3.3. Hypotheses Hypotheses HH00: : = 0 (No Correlation) = 0 (No Correlation)

HHaa: : 0 (Correlation) 0 (Correlation)

10 - 10 - 124124


ConclusionConclusion

1.1. Described the Linear Regression ModelDescribed the Linear Regression Model

2.2. Stated the Regression Modeling StepsStated the Regression Modeling Steps

3.3. Explained Ordinary Least SquaresExplained Ordinary Least Squares

4.4. Computed Regression CoefficientsComputed Regression Coefficients

5.5. Predicted Response VariablePredicted Response Variable

6.6. Interpreted Computer OutputInterpreted Computer Output

End of Chapter

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