Big Picture in Focus: ULOd (Laboratory).

Compute the Model

Variation

Metalanguage
Below are the essential terms you are going to use in this unit. You also need
to revisit the discussion in ULOa to understand the topic.

1. The Coefficient of Determination or R-squared (R2) is a statistical measure in a

regression model that determines the proportion of variance in the dependent
variable that can be explained by the independent variable.
2. The Y represents the observed dependent variable or the actual dependent
variable.
3. The 𝒀 or Y-hat represents the predicted Y. It is computed based on the model
derived from the regression estimation.
4. The 𝒀 or Y-prime represents the mean of the dependent variable.
5. The Standard Error of the Estimates is a measure of the accuracy of linear
regression prediction. It is the standard deviation of the regression model.

Essential Knowledge

Management can use the simple linear regression model in predicting and
explaining business variables like monthly sales. In the case of EDS Philippines, you
provide their management regression model (MS = -2.5278 + 1.6695PQ) to tell their
declining market share. However, someone from the management asked you how
reliable your model is. This question can be answered using the coefficient of
determination or the R-square. This topic was already discussed in ULOa.

In this unit, you will use the data from the EDS Philippines case. Last time, the
R-square was computed automatically using the Data Analysis commands. In this
unit, you will calculate the R-square using MS Excel without using the Data Analysis
tool. The result shows that the R-square is 0.7067.
 To compute the R-square, do the following steps.

1. Insert new worksheet and copy the data from the EDS Philippines case.

2. Rename PQ to X (Independent Variable) and MS to Y (Dependent Variable).

Add also columns for the Y-hat, Y-prime, SST, SSR, and SST.
3. Compute the Y-hat or the predicted Y using the model 𝑀𝑆 = -2.5278 +
1.6695PQ or 𝒀 = -2.5278 + 1.6695X. In cell C2 enter the following formula
= -2.5278+(1.6695*A2)

Copy and paste the formula to cells C3 to C16.

4. Compute the Y-prime by getting the mean of the Y. Use the Average function in
cells C2 to C16.
=AVERAGE($B$2:$B$16)
5. The SST is the square of the difference between the Y and the average Y or the
Y-prime. The formula is 𝑆𝑆𝑇 = ∑(𝑌 − 𝑌) . You need to compute first the
(𝑌 − 𝑌) in cell E2 by entering the following excel formula
=(B2-D2)^2

Copy and paste the formula to cells E3 to E16.

6. Using the function SUM, in cell E17, sum up cells E2 to E16.

7. The SSR is the square of the difference the predicted Y (𝒀) and the average Y
(𝑌). The formula is 𝑆𝑆𝑅 = ∑(𝒀 − 𝒀) . Enter the following formula in cell F2 to
compute the (𝒀 − 𝒀) .
=(C2-D2)^2
 Copy and paste the formula to cells F3 to F16.

8. Using the function SUM, in cell F17, sum up cells F2 to F16.

9. The SSE is the square of the difference the actual Y (𝒀) and the predicted Y
(𝒀). The formula is 𝑆𝑆𝐸 = ∑(𝑌 − 𝑌) . Enter the following formula in cell G2 to
compute the (𝒀 − 𝒀) .
=(B2-C2)^2

Copy and paste the formula to cells G3 to G16.

10. Using the function SUM, in cell G17, sum up cells G2 to G16
11. You can also compute the SST using the formula SST = SSR + SSE.
SST = 115.083 + 47.7478 or 162.83

12. The formula for R-square is

𝑆𝑆𝑅
𝑅 =
𝑆𝑆𝑇
In cell J1, enter the following formula.
=F17/E17

The result means that 70.67% of the variation in market share can be explained
by Product Quality. The remaining percentage of the variation can be explained by
other factors.

13. The standard error formula is

𝑆𝑆𝐸
𝑆 =
𝑛−2
In cell J2, enter the following formula
=SQRT(G17/(COUNT(G2:G16)-2))

14. The final output is