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1. Suppose that your market research of real estate investments reveals the following sales figures for
new homes of different prices over the past year.



 


 $160 $180 $200 $220 $240 $260 $280

 





 
  126 103 82 75 82 40 20

We would like to use these data to construct a demand function for the real estate market. (Recall that
a demand function gives demand y, measured here by annual sales, as a function of unit price, x.)
Here is a plot of y versus x.

Find a linear demand equation that best fits the data, and use it to predict annual sales of homes priced
at $140,000.




Here is the table we use to organize the calculations.


 
160 126 20,160 25,600
180 103 18,540 32,400
200 82 16,400 40,000
220 75 16,500 48,400
240 82 19,680 57,600
260 40 10,400 67,600
280 20 5,600 78,400
2
 x = 1,540 y = 528 xy = 107,280 x = 350,000

Substituting these values in the formula gives (n = 7)

n( xy) - ( x)( y) 7(107,280) - (1,540)(528)

slope = m = = -0.7929
 n( x2) - ( x)2 7(350,000) - 1,5402

y - m( x) 528 -(- 0.7928571429)(1,540)

intercept = b = = 249.9
n 7

Notice that we used the most accurate value, m = -0.7928571429, that we could obtain on our
calculator in the formula for b rather than the rounded value -0.7929. This illustrates the following
important general guideline:

When calculating, never round intermediate results. Rather, use the most accuate results
obtainable, or have your calculator store them for you.

Thus our least squares line is

y = -0.7929x + 249.9.

We can now use this equation to predict the annual sales of homes priced at $140,000, as we were
asked to do. Remembering that x is the price in thousands of dollars, we set x = 140, and solve for y,
getting y 139. Thus our model predicts that approximately 139 homes will have been sold at the
price of $140,000.

Here is the original data, together with the least squares line.

Q If the given data points all happen to lie on a straight line, is this the line we get by the best fit
method?
A Yes.

Q If the given points do not lie on a straight line, is there a way we can tell how far off they are from
lying on a straight line?
A There is a way of measuring the "goodness of fit" of the least squares line, called the coefficient of
correlation. This is a number r between -1 and 1. the closer it is to -1 or 1, the better the fit. For an
exact fit, we would have r = -1 (for a negative slope line) or r = 1 (for a positive slope line). For a bad
fit, we would have r close to 0. For our fit we get r = -0.954.

2. Best Fit Exponential Curve (Regression Exponential Curve)

Q Now we know how to fit a straight line to given data. What about an exponential curve, of the form

q = Art ?

A The idea is to convert an exponential curve to a linear one, using the logarithm, as follows.

Start with the exponential function

q = Art ,

and take the logarithm of both sides:

log(q) = log(Art).

The properties of logarithms give

log(q) = log(A) + log(rt )

or

log(q) = log(A) + t log(r).

This expresses log(q) as a linear function of t, with

slope = m = log(r)
Intercept = b = log(A).

Therefore, if we find the best-fit line using log(q) as a function of t, the slope and intercept will be
given as above, and so we can obtain r and A by

r = 10 m
A = 10 b.

To summarize,

c 
 



To obtain a best-fit exponential curve of the form

q = Art :

1. Take y = log(q), and x = t.

2. Find the regression line y = mx + b for the data (x, y).
3. The desired exponential model is

q = Art ,

where r = 10m, and A = 10b.

ð

Sales of Compaq
Revenues from sales of Compaq computers are shown in the following table, where x represents time
in years since 1990.* Obtain an exponential regression model for the data.



 
!""#

# 0 2 4 7



$

%
 3 4 11 25

* Data are rounded. Source: Company Reports/O

O

 January 27, 1998, p. D1.




Since we need to model log(R) as a linear function of t, we first make a table with x = t and
y = log(R), and then calculate the regression line, y = mx + b.


 0 2 4 7




 0.477121 0.602060 1.04139 1.39794

The linear regression model we obtain is

y = 0.13907x + 0.42765.

Thus, the desired exponential model is

R = Ar t,

where r = 10m = 100.13907 1.3774, and A = 100.42765. 2.6770.

This gives our revenue model as

R = 2.6770 (1.3774)t .