FACULTY OF COMPUTER AND MATHEMATICAL SCIENCES

BACHELOR OF SCIENCE (HONS.) ACTUARIAL SCIENCE

ECO555: MANAGERIAL ECONOMICS

GROUP PROJECT: REGRESSION ANALYSIS

PREPARED FOR:

PROFESOR MADYA ZAIDI MOHD AMINUDDIN

PREPARED BY:

NAME STUDENT ID GROUP

SITI FATIMAH BINTI MOHAMED SALLEH 2019461952 CS2426C
ADAWIYAH BINTI RAIMEY 2019496436 CS2426C
QUESTION 1

Turtle Pizza, Sdn Bhd, is a regional franchisor of home delivery pizza outlets. To better effects.
To assess the effects of price, advertising, and income on pizza demand, the company has
conducted and compiled the following survey of monthly sales and operating data at 15 of the
company’s outlet in Malaysia:

Advertising
Disposable Income
Quantity Sold Price Expenditures
per Household
per Month

42,100 $11.77 $46,100 $38,000

55,500 9.96 47,200 39,100

71,100 12.36 60,900 40,100

63,200 12.49 55,600 44,200

77,200 10.68 64,400 41,800

70,900 12.07 60,700 44,800

55,600 11.97 52,100 39,900

70,700 11.23 57,900 43,600

71,400 11.26 55,600 41,700

79,400 9.79 60,100 41,200

60,600 12.29 50,700 44,000

50,800 12.70 46,500 43,300

61,800 12.33 58,600 41,000

40,500 10.88 42,800 38,300

85,300 10.14 64,800 42,100

a) Use regression analysis to estimate pizza demand using a multiple regression

approach including all three independent variables. In your report, please include the
following information: the objective, the general equation, economic theory, the
estimated equation, standard error of parameter, t-statistics, R-square and the
standard error of estimates.

i. Objective
 The regression analysis is trying to establish a functional relationship between Quantity
Sold (Yt) with Price (X1), Advertising Expenditure (X2) and Disposable Income (X3).

ii. General Equation

𝑌̂𝑡 = 𝑐̂ + 𝑏̂1 . 𝑋1 + 𝑏
̂2 . 𝑋2 + 𝑏
̂3 . 𝑋3

iii. Economic Theory: All signs of coefficient conform to the economic theory

Independent Estimated Economic Relationship Comment

Variables Sign Theory with Dependent
Variable

Price (X₁) - - When price The

increases by 1 negative
dollar, the relationship
quantity of pizza follows the
sold decreases law of
by 4041.534 demand
units

Advertising + + When Consistent

Expenditure advertising because
(X₂) expenditure advertising
increases by 1 usually has
dollar, the direct
quantity of pizza relationship
sold increases with quantity
by 1.454 units sold

Disposable + + When Consistent

Income (X3) disposable showing that
income the pizza is
increases by 1 a normal
dollar, the good
quantity of pizza
sold increases
by 1.528 units
iv. Estimated Equation

̂
𝑌̂𝑡 = −33301.728 ̂ . 𝑋1 + 1.454
− 4041.534 ̂ . 𝑋2 + 1.528
̂ . 𝑋3

v. R-square

R² = 0.950

It shows that 95.0% of the changes in the dependent variable (Quantity Sold) can be
explained by the independent variables in the equation, i.e Price, Advertising
Expenditure and Disposable Income. But the other 5.0% cannot be explained by the
regression due to the omission of some other important independent variables.

vi. Standard error of parameter

Variables Coefficients standard Interpretation

error of parameter

Price 1040.640 One standard deviation

increase in price leads to
1040.640 standard
deviation increase in the
quantity sold, keeping
other variables constant.

Advertising 0.152 One standard deviation

Expenditure increase in advertising
expenditure leads to
0.152 standard deviation
increase in the quantity
sold, keeping other
variables constant.

Disposable 0.513 One standard deviation

Income increase in disposable
income leads to 0.513
 standard deviation
increase in the quantity
sold, keeping other
variables constant.

vii. t-statistics

Hypothesis testing:

H₀: The variable is not significant in explaining the quantity of pizza sold.

H₁: The variable is significant in explaining the quantity of pizza sold.

At 95% confidence interval, degree of freedom,

df = n − k − 1

= 15 − 3 − 1

= 11

t-critical value:

𝑡11 , ₀. ₀₅= 2.201

t-statistic value and conclusion:

Independent t-statistic value t-critical value Conclusion

variables

Price |−3.884| = 3.884 2.201 Since t-statistic

value = 3.884 > t-
critical value =
2.201, price is
significant in
explaining the
quantity sold.

Advertising 9.593 2.201 Since t-statistic

Expenditure value = 9.593 > t-
 critical value=
2.201, advertising
expenditure is
significant in
explaining the
quantity sold.

Disposable 2.979 2.201 Since t-statistic

Income value = 2.979 > t-
critical value =
2.201, disposable
income is
significant in
explaining the
quantity sold.

viii. The standard error of estimates

SEE = 3333.092

At 95% confidence interval,

Ŷ ± [(tₙ₋ₖ,₀.₀₅) × SEE] = Ŷ ± [(t₁₅₋3,₀.₀₅) × SEE]

= Ŷ ± [(t₁2,₀.₀₅) × SEE]

= Ŷ ± (2.179 × 3333.092)

= Ŷ ± (7262.8075)

ix. F-statistics

Hypothesis testing:

H₀: There is no significant relationship between the quantity sold with the price,
advertising expenditure and disposable income.

H₁: There is a significant relationship between the quantity sold with the price,
advertising expenditure and disposable income.

F-critical value:
 F₂,₁₄,₀.₀₅ = 3.74

F-statistic value = 69.175

Conclusion:

Since F-statistic value = 69.175 is greater than F-critical value = 3.74, there is a
significant relationship between the quantity sold with the price, advertising
expenditure and disposable income.

x. Durbin Watson

The Durbin-Watson value = 1.542

Since the value of Durbin-Watson is not in between the interval 1.8 to 2.2, it shows that
there is an autocorrelation problem that can arise in the regression analysis with time
series data. There are 3 possibilities where autocorrelation or multicollinearity
problems can arise in the regression analysis, i.e. when independent variables are
interrelated or duplicated, where independent variables have been miss-specified, and
where important independent variables are found missing.

b) Based on the analysis, do you think the above estimated equation can be acceptable?

Yes, the above estimated equation is acceptable because all independent variables within
the equation conform with the economic theory. The independent variables also have
significant relationships with dependent variables, in which price (X₁), advertising
expenditure (X₂), and disposable income (X3) are significant in explaining the changes in
the quantity sold (Yₜ).
QUESTION 2

Given the data on electric power consumption (in billions of kilowatt-hours). GNP (in billions
of dollars), and electricity prices (in cents per kilowatt-hour) for period 1998 – 2012 are shown
here.

Year Consumption GNP Price

1998 407.9 994.0 2.09

1999 447.8 992.7 2.10

2000 479.1 1077.6 2.19

2001 511.4 1185.9 2.29

2002 554.2 1326.4 2.38

2003 555.0 1434.2 2.83

2004 586.1 1594.2 3.21

2005 613.1 1718.0 3.45

2006 652.3 1918.3 3.78

2007 679.2 2163.9 4.03

2008 696.0 2417.8 4.43

2009 734.4 2631.7 5.12

2010 730.5 2957.8 5.80

2011 732.7 3069.3 6.44

2012 750.9 3304.8 6.83

a) Using regression analysis, estimate consumption as a linear function of GNP, price,

and the previous year’s electric consumption. In your report, please include the
following information: the objective, the general equation, economic theory, the
estimated equation, R- square, standard error of parameter, t-statistics and the
standard error of estimates. Are the signs of the estimated coefficients consistent with
 economic theory? Which of the coefficients are statistically significant at the 0.05 level
(or at 95% confidence interval)?

i. The objective

The regression analysis is trying to establish a functional relationship between the

Electric Power Consumption (Yₜ) with GNP (X₁) and Electricity Price (X₂)

ii. The general equation

Yₜ = c + b₁X₁ + b₂X₂

iii. Economic theory

Independent Estimated Economic Relationship Comment

Variables Sign Theory with Dependent
Variable

GNP (X₁) + + When GNP Conform to

increases by 1 the
billion dollar, the economic
electric power theory
consumption
increases by
0.381 billion
kilowatt-hours

Electricity − − When electricity Conform to

Price (X₂) price decreases the
by 1 cent, the economic
electric power theory
consumption
decreases by
121.927 billion
kilowatt-hours
iv. The estimated equation

Yₜ = 339.651 + 0.381X₁ − 121.927X₂

v. R-square

R² = 0.945

It shows that 94.5 % of the changes in the dependent variable (Electric Power
Consumption) can be explained by the independent variables in the equation, i.e GNP
and Electricity Price. But the other 5.5% cannot be explained by the regression due to
the omission of some other important independent variables.

vi. Standard error of parameter

Variables Coefficients standard Interpretation

error of parameter

GNP 0.081 One standard deviation

increase in GNP leads to
0.081 standard deviation
increase in the electric
power consumption,
keeping other variables
constant.

Electricity Price 40.110 One standard deviation

increase in electricity
price leads to 40.110
standard deviation
increase in the electric
power consumption,
keeping other variables
constant.
vii. t-statistics

Hypothesis testing:

H₀: The variable is not significant in explaining the electric power consumption.

H₁: The variable is significant in explaining the electric power consumption.

At 95% confidence interval, degree of freedom,

df = n − k − 1

= 15 − 2 − 1

= 12

t-critical value:

t₁₂, ₀. ₀₅= 2.179

t-statistic value and conclusion:

Independent t-statistic value t-critical value Conclusion

variables

GNP 4.681 2.179 Since t-statistic

value = 4.681 > t-
critical value =
2.179, GNP is
significant in
explaining the
electric power
consumption.

Electricity Price |−3.040| = 3.040 2.179 Since t-statistic

value = 3.040 > t-
critical value=
2.179, electricity
price is significant
in explaining the
electric power
 consumption.

viii. The standard error of estimates

SEE = 28.6651

At 95% confidence interval,

Ŷ ± [(tₙ₋ₖ,₀.₀₅) × SEE] = Ŷ ± [(t₁₅₋₂,₀.₀₅) × SEE]

= Ŷ ± [(t₁₃,₀.₀₅) × SEE]

= Ŷ ± (2.16 × 28.6651)

= Ŷ ± (61.9166)

ix. F-statistics

Hypothesis testing:

H₀: There is no significant relationship between the electric power consumption with
the GNP and electricity price.

H₁: There is a significant relationship between the electric power consumption with the
GNP and electricity price.

F-critical value:

F₂,₁₄,₀.₀₅ = 3.74

F-statistic value = 103.276

Conclusion:

Since F-statistic value = 103.276 is greater than F-critical value = 3.74, there is a
significant relationship between the electric power consumption with the GNP and
electricity price.

x. Durbin Watson

The Durbin-Watson value = 1.059

 Since the value of Durbin-Watson is not in between the interval 1.8 to 2.2, it shows that
there is an autocorrelation problem that can arise in the regression analysis with time
series data. There are 3 possibilities where autocorrelation or multicollinearity
problems can arise in the regression analysis, i.e. when independent variables are
interrelated or duplicated, where independent variables have been miss-specified, and
where important independent variables are found missing.

b) Based on the analysis, do you think the above estimated equation can be acceptable?

Yes, the above estimated equation is acceptable because all independent variables within
the equation conforms with the economic theory. The independent variables also have
significant relationships with dependent variables, in which GNP (X₁) and electricity price
(X₂) are significant in explaining the changes in the electric power consumption (Yₜ).

c) In 2013, GNP was $3,661.3 billion and the price of electricity was 7.16 cents per
kilowatt-hour. Use the estimating equation from part (a) to predict electricity
consumption for 2013.

Yₜ = 339.651 + 0.381X₁ − 121.927X₂

Ŷ = 339.651 + 0.381(3661.3) − 121.927(7.16)

Ŷ = 861.60898

Hence, the predicted electricity consumption for 2013 is 861.609 billion kilowatt-hours.
APPENDICES

Exercise 1 SPSS Output

Exercise 2 SPSS Output