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Chapter 12
Simple Linear Regression
Simple Linear Regression Model
Least Squares Method
Coefficient of Determination
Model Assumptions
Testing for Significance
Using the Estimated Regression Equation
for Estimation and Prediction
Computer Solution
Residual Analysis: Validating Model Assumptions
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The equation that describes how y is related to x and
an error term is called the regression model.
The simple linear regression model is:

y = |
0
+ |
1
x +c

|
0
and |
1
are called parameters of the model.
c is a random variable called the error term.
Simple Linear Regression Model
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n The simple linear regression equation is:

E(y) = |
0
+ |
1
x

Graph of the regression equation is a straight line.
|
0
is the y intercept of the regression line.
|
1
is the slope of the regression line.
E(y) is the expected value of y for a given x value.
Simple Linear Regression Equation
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Simple Linear Regression Equation
n Positive Linear Relationship
E(y)
x
Slope |
1
is positive
Regression line
Intercept
|
0

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Simple Linear Regression Equation
n Negative Linear Relationship
E(y)
x
Slope |
1
is negative
Regression line
Intercept
|
0

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Simple Linear Regression Equation
n No Relationship
E(y)
x
Slope |
1
is 0
Regression line
Intercept
|
0

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n The estimated simple linear regression equation is:

The graph is called the estimated regression line.
b
0
is the y intercept of the line.
b
1
is the slope of the line.
is the estimated value of y for a given x value.

Estimated Simple Linear Regression Equation
0 1

y b b x = +

y
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Estimation Process

Regression Model
y = |
0
+ |
1
x +c
Regression Equation
E(y) = |
0
+ |
1
x
Unknown Parameters
|
0
, |
1

Sample Data:
x y
x
1
y
1
. .
. .
x
n
y
n

Estimated
Regression Equation

Sample Statistics
b
0
, b
1

b
0
and b
1

provide estimates of
|
0
and |
1
0 1

y b b x = +
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Least Squares Criterion

where:
y
i
= observed value of the dependent variable
for the ith observation
y
i
= estimated value of the dependent variable
for the ith observation

Least Squares Method
min (y y
i i

)
2
^
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Slope for the Estimated Regression Equation

b
x y x y n
x x n
i i i i
i i
1
2 2
=

( ) /
( ) /
The Least Squares Method
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n y-Intercept for the Estimated Regression Equation

where:
x
i
= value of independent variable for ith observation
y
i
= value of dependent variable for ith observation
x = mean value for independent variable
y = mean value for dependent variable
n = total number of observations
_
_
The Least Squares Method
0 1
b y b x =
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Example: Reed Auto Sales
Simple Linear Regression
Reed Auto periodically has a special week-long
sale. As part of the advertising campaign Reed runs
one or more television commercials during the
weekend preceding the sale. Data from a sample of 5
previous sales are shown on the next slide.
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Example: Reed Auto Sales
n Simple Linear Regression

Number of TV Ads Number of Cars Sold
1 14
3 24
2 18
1 17
3 27
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Slope for the Estimated Regression Equation

b
1
= 220 - (10)(100)/5 = _____
24 - (10)
2
/5
y-Intercept for the Estimated Regression Equation
b
0
= 20 - 5(2) = _____
Estimated Regression Equation

y = 10 + 5x
^
Example: Reed Auto Sales
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Example: Reed Auto Sales
Scatter Diagram

y = 10 + 5x
0
5
10
15
20
25
30
0 1 2 3 4
TV Ads
C
a
r
s

S
o
l
d
^
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Relationship Among SST, SSR, SSE

SST = SSR + SSE

where:
SST = total sum of squares
SSR = sum of squares due to regression
SSE = sum of squares due to error
The Coefficient of Determination
( ) ( ) ( ) y y y y y y
i i i i

2 2 2
^
^
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n The coefficient of determination is:

r
2
= SSR/SST

where:
SST = total sum of squares
SSR = sum of squares due to regression
The Coefficient of Determination
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Coefficient of Determination

r
2
= SSR/SST = 100/114 =
The regression relationship is very strong because
88% of the variation in number of cars sold can be
explained by the linear relationship between the
number of TV ads and the number of cars sold.
Example: Reed Auto Sales
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The Correlation Coefficient
Sample Correlation Coefficient

where:
b
1
= the slope of the estimated regression
equation
2
1
) of (sign r b r
xy
=
ion Determinat of t Coefficien ) of (sign
1
b r
xy
=
x b b y
1 0

+ =
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Sample Correlation Coefficient

The sign of b
1
in the equation is +.

r
xy
= +.9366

Example: Reed Auto Sales
2
1
) of (sign r b r
xy
=

10 5 y x = +
=+ .8772
xy
r
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Model Assumptions
Assumptions About the Error Term c
1. The error c is a random variable with mean of
zero.
2. The variance of c , denoted by o
2
, is the same for
all values of the independent variable.
3. The values of c are independent.
4. The error c is a normally distributed random
variable.
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Testing for Significance
To test for a significant regression relationship, we
must conduct a hypothesis test to determine whether
the value of |
1
is zero.
Two tests are commonly used
t Test
F Test
Both tests require an estimate of o
2
, the variance of c
in the regression model.
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An Estimate of o
2
The mean square error (MSE) provides the estimate
of o
2
, and the notation s
2
is also used.

s
2
= MSE = SSE/(n-2)

where:
Testing for Significance

= =
2
1 0
2
) ( )

( SSE
i i i i
x b b y y y
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Testing for Significance
An Estimate of o
To estimate o we take the square root of o
2
.
The resulting s is called the standard error of the
estimate.
2
SSE
MSE

= =
n
s
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Hypotheses

H
0
: |
1
= 0
H
a
: |
1
= 0

Test Statistic

where

Testing for Significance: t Test
t
b
s
b
=
1
1

=
2
) (
1
x x
s
s
i
b
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n Rejection Rule

Reject H
0
if t < -t
o/2
or t > t
o/2

where: t
o/2
is based on a t distribution
with n - 2 degrees of freedom
Testing for Significance: t Test
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t Test
Hypotheses
H
0
: |
1
= 0
H
a
: |
1
= 0

Rejection Rule
For o = .05 and d.f. = 3, t
.025
= _____
Reject H
0
if t > t
.025
= _____
Example: Reed Auto Sales
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n t Test
Test Statistics
t = _____/_____ = 4.63
Conclusions
t = 4.63 > 3.182, so reject H
0

Example: Reed Auto Sales
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Confidence Interval for |
1
We can use a 95% confidence interval for |
1
to test
the hypotheses just used in the t test.
H
0
is rejected if the hypothesized value of |
1
is not
included in the confidence interval for |
1
.

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The form of a confidence interval for |
1
is:

where b
1
is the point estimate
is the margin of error
is the t value providing an area
of o/2 in the upper tail of a
t distribution with n - 2 degrees
of freedom

Confidence Interval for |
1
1
2 / 1 b
s t b
o

1
2 / b
s t
o
2 / o
t
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Rejection Rule
Reject H
0
if 0 is not included in
the confidence interval for |
1
.
95% Confidence Interval for |
1

= 5 +/- 3.182(1.08) = 5 +/- 3.44

or ____ to ____

Conclusion

0 is not included in the confidence interval.
Reject H
0
Example: Reed Auto Sales
1
2 / 1 b
s t b
o

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n Hypotheses

H
0
: |
1
= 0
H
a
: |
1
= 0

n Test Statistic

F = MSR/MSE
Testing for Significance: F Test
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n Rejection Rule

Reject H
0
if F > F
o

where: F
o
is based on an F distribution
with 1 d.f. in the numerator and
n - 2 d.f. in the denominator
Testing for Significance: F Test
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n F Test
Hypotheses
H
0
: |
1
= 0
H
a
: |
1
= 0
Rejection Rule
For o = .05 and d.f. = 1, 3: F
.05
= ______
Reject H
0
if F > F
.05
= ______.
Example: Reed Auto Sales
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n F Test
Test Statistic
F = MSR/MSE = ____ / ______ = 21.43
Conclusion
F = 21.43 > 10.13, so we reject H
0
.
Example: Reed Auto Sales
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Some Cautions about the
Interpretation of Significance Tests
Rejecting H
0
: |
1
= 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.
Just because we are able to reject H
0
: |
1
= 0 and
demonstrate statistical significance does not enable us
to conclude that there is a linear relationship between
x and y.
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n Confidence Interval Estimate of E(y
p
)

n Prediction Interval Estimate of y
p

y
p
+ t
o/2
s
ind

where: confidence coefficient is 1 - o and
t
o/2
is based on a t distribution
with n - 2 degrees of freedom

Using the Estimated Regression Equation
for Estimation and Prediction

/
y t s
p y
p

o 2
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Point Estimation
If 3 TV ads are run prior to a sale, we expect the
mean number of cars sold to be:

y = 10 + 5(3) = ______ cars

^
Example: Reed Auto Sales
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n Confidence Interval for E(y
p
)
95% confidence interval estimate of the mean
number of cars sold when 3 TV ads are run is:

25 + 4.61 = ______ to _______ cars
Example: Reed Auto Sales
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n Prediction Interval for y
p

95% prediction interval estimate of the number of
cars sold in one particular week when 3 TV ads are
run is:

25 + 8.28 = _____ to ______ cars
Example: Reed Auto Sales
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Residual for Observation i

y
i
y
i

Standardized Residual for Observation i

where:

and
Residual Analysis
^
y y
s
i i
y y
i i

^
^
s s h
y y i
i i

= 1
^

+ =
2
2
) (
) ( 1
x x
x x
n
h
i
i
i
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Example: Reed Auto Sales
Residuals
Observation Predicted Cars Sold Residuals
1 15 -1
2 25 -1
3 20 -2
4 15 2
5 25 2
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Example: Reed Auto Sales
Residual Plot
TV Ads Residual Plot
-3
-2
-1
0
1
2
3
0 1 2 3 4
TV Ads
R
e
s
i
d
u
a
l
s
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Residual Analysis
Residual Plot
x

y y
0
Good Pattern
R
e
s
i
d
u
a
l

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Residual Analysis
n Residual Plot
x

y y
0
Nonconstant Variance
R
e
s
i
d
u
a
l

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Residual Analysis
n Residual Plot
x

y y
0
Model Form Not Adequate
R
e
s
i
d
u
a
l

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End of Chapter 12