Name : Yuriza Maulidina

NIM : 17053104

Simple Linear Regression

Regression analysis is concerned with the study of the dependence of one variable,on one or
more other variables, the explanatory varuable, with a view to estimating and or predicting the
(population) mean or average value of the former in terms of the known or fiexed (in repeated
sampling) values of the latter.

1. Population Regression Function

● Where f (Xi) describes a function of the variable that explains Xi.

● E (Y | Xi) is a linear function of Xi.
● Equation (1) is known as the population regression function (PRF) or often abbreviated
as population regression (PR).
● The function states that the average (population) of the Y distribution for certain Xi is
functionally related to Xi. In other words the function states how the average value
(population) varies with X.

Assume that PRF E (Y | X) is a linear function of Xi:

● Where β0 and β1 parameters are not known magnitude but still (fixed) known as the
regression coefficient.
● β0 and β1 are respectively known as intercept and slope coefficient.
● Equation (2) is known as a linear regression function or linear population regression.

2. The meaning of term “linear”

▶ Linear in variables

▶ Linear in parameters
 = Linear in variables

= Non linear in variables

= Linear in parameters

= Non linear in parameters

Linear in variables and parameters

▶ In a simple regression analysis, LINIER means linear in the PARAMETER

▶ Highest level parameter 1

▶ Allowed more than one power for variables

Both are linear in parameters:

Simple Linear Regression Model

3. Specification of PRF stochastic

● Where ui deviation is a random variable that cannot be observed which can take positive
or negative values. Technically, UI is known as a stochastic disturbance, or a stochastic
error term factor.
● If it is assumed to be linear in Xi, equation (4) can be written as follows:
 ● Equation (6) means that:

E(u|Xi) = 0

● So the assumption that the regression line passes through the conditional average of Y
means that the conditional average value of ui (depending on certain X) is zero.

4. The basic nature of the stochastic diaturbance factor

a. because of an error in the equation
for example, the model Y = α + βX + U; Y indicates consumption expenditure and X is
ready-to-use income, this model states that consumption expenditure depends entirely on
ready-to-use income. In reality, there are various other factors, such as composition and
number of families, variations in age, tastes and habits that can affect family
consumption, but these factors are ignored in the equation model. Thus, it cannot be
estimated that the relationship is a definite relationship, unless the other factors are
assumed to remain constant. Insertion of factor U in the equation will represent the set of
influences of all neglected variables.
b. because of a measurement error (an error in a variable)
factor U can represent errors in measurement, both in recording, collecting and
processing data X and Y.
c. due to imperfection in the mathematical form specification of the model
in fact there are actually some similarities in the model, but they are not included because
economic phenomena are far more complex if they are included in a single equation.
Factor U can identify errors in imperfections in the model form or errors related to the
number of model equations.
d. because of aggregation
often the data used is aggregate data, such as consumption and aggregate income
obtained by summing individual quantities that have behavior not the same as the
behavior of aggregate quantities. Data aggregation can cause errors in relationships
between variables. The aggregation takes the form of: runrun time aggregation, spatial
aggregation, time cross aggregation and so on. In the equation model, explanatory
variables are included in the model as separate variables, and the remainder as random
disturbance variables. Insertion to enter influential variables but difficult to separate.
5. Sample Regression Function (SRF)

• An estimator, also known as a statistic (sample) is only a formula or method which states how
to estimate population parameters of that information given by the sample owned.
• A special number value obtained by the estimator in an analysis is known as estimate.

▶ Regression formed from the sample

▶ Used to predict population regression

▶ It will never be the same for different samples

Co
mponent error sample with the same assumptions as population errors.