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1 1 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
SLIDES . BY
John LoucksSt. Edward’sUniversity
...........
2 2 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 12, Part ASimple Linear Regression
Simple Linear Regression Model Least Squares Method Coefficient of Determination Model Assumptions Testing for Significance
3 3 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression
Regression analysis can be used to develop an equation showing how the variables are related.
Managerial decisions often are based on the relationship between two or more variables.
The variables being used to predict the value of the dependent variable are called the independent variables and are denoted by x.
The variable being predicted is called the dependent variable and is denoted by y.
4 4 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression
The relationship between the two variables is approximated by a straight line.
Simple linear regression involves one independent variable and one dependent variable.
Regression analysis involving two or more independent variables is called multiple regression.
5 5 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression Model
y = b0 + b1x +e
where: b0 and b1 are called parameters of the model,
e is a random variable called the error term.
The simple linear regression model is:
The equation that describes how y is related to x and an error term is called the regression model.
6 6 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression Equation
The simple linear regression equation is:
• E(y) is the expected value of y for a given x value.
• b1 is the slope of the regression line.
• b0 is the y intercept of the regression line.
• Graph of the regression equation is a straight line.
E(y) = 0 + 1x
7 7 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression Equation
Positive Linear Relationship
E(y)
x
Slope b1
is positive
Regression line
Intercept b0
8 8 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression Equation
Negative Linear Relationship
E(y)
x
Slope b1
is negative
Regression lineIntercept
b0
9 9 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression Equation
No Relationship
E(y)
x
Slope b1
is 0
Regression lineIntercept b0
10 10 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Estimated Simple Linear Regression Equation
The estimated simple linear regression equation
0 1y b b x
• is the estimated value of y for a given x value.y• b1 is the slope of the line.
• b0 is the y intercept of the line.
• The graph is called the estimated regression line.
11 11 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Estimation Process
Regression Modely = b0 + b1x +e
Regression EquationE(y) = b0 + b1x
Unknown Parametersb0, b1
Sample Data:x y
x1 y1
. . . . xn yn
b0 and b1
provide estimates ofb0 and b1
EstimatedRegression Equation
Sample Statistics
b0, b1
0 1y b b x
12 12 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Least Squares Method
Least Squares Criterion
min (y yi i )2
where:yi = observed value of the dependent variable
for the ith observation^yi = estimated value of the dependent variable
for the ith observation
13 13 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Slope for the Estimated Regression Equation
1 2
( )( )
( )i i
i
x x y yb
x x
Least Squares Method
where:xi = value of independent variable for ith observation
_y = mean value for dependent variable
_x = mean value for independent variable
yi = value of dependent variable for ith observation
14 14 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
y-Intercept for the Estimated Regression Equation
Least Squares Method
0 1b y b x
15 15 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Reed Auto periodically has a special week-long sale.
As part of the advertising campaign Reed runs one or
more television commercials during the weekendpreceding the sale. Data from a sample of 5
previoussales are shown on the next slide.
Simple Linear Regression
Example: Reed Auto Sales
16 16 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Simple Linear Regression
Example: Reed Auto Sales
Number of TV Ads (x)
Number ofCars Sold (y)
13213
1424181727
Sx = 10 Sy = 1002x 20y
17 17 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Estimated Regression Equation
ˆ 10 5y x
1 2
( )( ) 205
( ) 4i i
i
x x y yb
x x
0 1 20 5(2) 10b y b x
Slope for the Estimated Regression Equation
y-Intercept for the Estimated Regression Equation
Estimated Regression Equation
18 18 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Coefficient of Determination
Relationship Among SST, SSR, SSE
where: SST = total sum of squares SSR = sum of squares due to regression SSE = sum of squares due to error
SST = SSR + SSE
2( )iy y 2ˆ( )iy y 2ˆ( )i iy y
19 19 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
The coefficient of determination is:
Coefficient of Determination
where:SSR = sum of squares due to regressionSST = total sum of squares
r2 = SSR/SST
20 20 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Coefficient of Determination
r2 = SSR/SST = 100/114 = .8772
The regression relationship is very strong; 87.72%of the variability in the number of cars sold can beexplained by the linear relationship between thenumber of TV ads and the number of cars sold.
21 21 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Sample Correlation Coefficient
21 ) of(sign rbrxy
ionDeterminat oft Coefficien ) of(sign 1brxy
where: b1 = the slope of the estimated regression
equation xbby 10ˆ
22 22 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
21 ) of(sign rbrxy
The sign of b1 in the equation is “+”.ˆ 10 5y x
=+ .8772xyr
Sample Correlation Coefficient
rxy = +.9366
23 23 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Assumptions About the Error Term e
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.
24 24 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Testing for Significance
To test for a significant regression relationship, we must conduct a hypothesis test to determine whether the value of b1 is zero.
Two tests are commonly used:
t Test and F Test
Both the t test and F test require an estimate of s 2, the variance of e in the regression model.
25 25 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
An Estimate of s 2
Testing for Significance
210
2 )()ˆ(SSE iiii xbbyyy
where:
s 2 = MSE = SSE/(n - 2)
The mean square error (MSE) provides the estimateof s 2, and the notation s2 is also used.
26 26 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Testing for Significance
An Estimate of s
2
SSEMSE
n
s
• To estimate s we take the square root of s 2.
• The resulting s is called the standard error of the estimate.
27 27 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Hypotheses
Test Statistic
Testing for Significance: t Test
0 1: 0H
1: 0aH
1
1
b
bt
s where
1 2( )b
i
ss
x x
28 28 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Rejection Rule
Testing for Significance: t Test
where: t is based on a t distribution
with n - 2 degrees of freedom
Reject H0 if p-value < a or t < -tor t > t
29 29 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
1. Determine the hypotheses.
2. Specify the level of significance.
3. Select the test statistic.
a = .05
4. State the rejection rule.Reject H0 if p-value < .05or |t| > 3.182 (with
3 degrees of freedom)
Testing for Significance: t Test
0 1: 0H
1: 0aH
1
1
b
bt
s
30 30 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Testing for Significance: t Test
5. Compute the value of the test statistic.
6. Determine whether to reject H0.
t = 4.541 provides an area of .01 in the upper tail. Hence, the p-value is .02.
(Also, t = 4.63 > 3.182.) We can reject H0.
1
1 54.63
1.08b
bt
s
31 31 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Confidence Interval for 1
H0 is rejected if the hypothesized value of 1 is not included in the confidence interval for 1.
We can use a 95% confidence interval for 1 to test the hypotheses just used in the t test.
32 32 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
The form of a confidence interval for 1 is:
Confidence Interval for 1
11 / 2 bb t s
where is the t value providing an areaof a/2 in the upper tail of a t distributionwith n - 2 degrees of freedom
2/tb1 is the
pointestimat
or
is themarginof error
1/ 2 bt s
33 33 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Confidence Interval for 1
Reject H0 if 0 is not included in
the confidence interval for 1.
0 is not included in the confidence interval. Reject H0
= 5 +/- 3.182(1.08) = 5 +/- 3.4412/1 bstb
or 1.56 to 8.44
Rejection Rule
95% Confidence Interval for 1
Conclusion
34 34 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Hypotheses
Test Statistic
Testing for Significance: F Test
F = MSR/MSE
0 1: 0H
1: 0aH
35 35 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Rejection Rule
Testing for Significance: F Test
where:F is based on an F distribution with
1 degree of freedom in the numerator andn - 2 degrees of freedom in the denominator
Reject H0 if p-value < a
or F > F
36 36 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
1. Determine the hypotheses.
2. Specify the level of significance.
3. Select the test statistic.
a = .05
4. State the rejection rule.Reject H0 if p-value < .05or F > 10.13 (with 1 d.f.
in numerator and 3 d.f. in denominator)
Testing for Significance: F Test
0 1: 0H
1: 0aH
F = MSR/MSE
37 37 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Testing for Significance: F Test
5. Compute the value of the test statistic.
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 = 21.43is less than .025. Hence, we reject H0.
F = MSR/MSE = 100/4.667 = 21.43
The statistical evidence is sufficient to concludethat we have a significant relationship between thenumber of TV ads aired and the number of cars sold.
38 38 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
Some Cautions about theInterpretation of Significance Tests
Just because we are able to reject H0: b1 = 0 and demonstrate statistical significance does not enable
us to conclude that there is a linear relationshipbetween x and y.
Rejecting H0: b1 = 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.
39 39 Slide Slide© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
End of Chapter 12, Part A