CH 13

Business Statistics, 4e
by Ken Black
Chapter 13
Discrete Distributions
Simple Regression
Analysis
Business Statistics, 4e, by Ken Black. © 2003 John Wiley & Sons.
13-1
Learning Objectives
• Compute the equation of a simple regression line from a

sample of data, and interpret the slope and intercept of the
equation.
• Understand the usefulness of residual analysis in testing the
assumptions underlying regression analysis and in
examining the fit of the regression line to the data.
• Compute a standard error of the estimate and interpret its
meaning.
• Compute a coefficient of determination and interpret it.
• Test hypotheses about the slope of the regression model and
interpret the results.
• Estimate values of Y using the regression model.
13-2
Regression and Correlation
• Regression analysis is the process of
constructing a mathematical model or
function that can be used to predict or
determine one variable by another variable.
• Correlation is a measure of the degree of

relatedness of two variables.
13-3
Simple Regression Analysis
• bivariate (two variables) linear regression --

the most elementary regression model
– dependent variable, the variable to be
predicted, usually called Y
– independent variable, the predictor or
explanatory variable, usually called X
13-4
Airline Cost Data
Number of
Passengers Cost ($1,000)
X Y
61 4.280
63 4.080
67 4.420
69 4.170
70 4.480
74 4.300
76 4.820
81 4.700
86 5.110
91 5.130
95 5.640
97 5.560
13-5
Scatter Plot of Airline Cost Data
4
Cost ($1000)
0
0 20 40 60 80 100 120
Number of Passengers
13-6
Regression Models
 Deterministic Regression Model
Y =  0 +  1X
 Probabilistic Regression Model
Y =  0 +  1X + 
 0 and 1 are population parameters
 0 and 1 are estimated by sample statistics b0 and b1
13-7
Equation of the Simple Regression
Line
Yˆ  b0  b1 X
where : b 0
= the sample intercept
b = the sample slope

1
Yˆ = the predicted value of Y
13-8
Least Squares Analysis
  X   Y 
  X  X Y  Y   XY  nXY  XY 
n
b  
 X  X   X n X
2 2 2

1 2
X 2
 X
n
 Y  X
b Y b X  n b n
0 1 1
13-9
Least Squares Analysis
 X  Y 
SSXY    X  X Y  Y    XY  n
 X  X 
2
 X
X
2
SSXX  
2

n
SSXY
b1  SSXX
 Y  X
b  Y b X  n b n
0 1 1
13-10
Solving for b1 and b0 of the Regression
Line: Airline Cost Example (Part 1)
Number of
Passengers Cost ($1,000)
X Y X2 XY
61 4.28 3,721 261.08

63 4.08 3,969 257.04
67 4.42 4,489 296.14
69 4.17 4,761 287.73
70 4.48 4,900 313.60
74 4.30 5,476 318.20
76 4.82 5,776 366.32
81 4.70 6,561 380.70
86 5.11 7,396 439.46
91 5.13 8,281 466.83
95 5.64 9,025 535.80
97 5.56 9,409 539.32
X = 930 Y = 56.69 X 2
= 73,764  XY = 4,462.22
13-11
Solving for b1 and b0 of the Regression
Line: Airline Cost Example (Part 2)
SS XY   XY   X Y  4,462.22 
(930)(56.69)
 68.745
n 12
( X ) 2 (930) 2
SS XX  X 2

n
 73,764 
12
 1689
SS XY 68.745
b1    .0407
SS XX 1689
b0 
Y  b1
X 
56.69
 (.0407)
930
 1.57
n n 12 12
Yˆ  1.57  .0407 X
13-12
Graph of Regression Line
for the Airline Cost Example
4
Cost ($1000)
0
0 20 40 60 80 100 120
13-13
Airline Cost: Excel Summary Output
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.94820033
R Square 0.89908386
Adjusted R Square 0.88899225
Standard Error 0.17721746
Observations 12
ANOVA
df SS MS F Significance F
Regression 1 2.79803 2.79803 89.092179 2.7E-06
Residual 10 0.31406 0.03141
Total 11 3.11209
Coefficients Standard Error t Stat P-value

Intercept 1.56979278 0.33808 4.64322 0.0009175
Number of Passengers 0.0407016 0.00431 9.43887 2.692E-06
13-14
Residual Analysis:
Airline Cost Example
Number of Predicted
Passengers Cost ($1,000) Value Residual
X Y Ŷ Y  Yˆ
61 4.28 4.053 .227

63 4.08 4.134 -.054
67 4.42 4.297 .123
69 4.17 4.378 -.208
70 4.48 4.419 .061
74 4.30 4.582 -.282
76 4.82 4.663 .157
81 4.70 4.867 -.167
86 5.11 5.070 .040
91 5.13 5.274 -.144
95 5.64 5.436 .204
97 5.56 5.518 .042
 (Y  Yˆ )  .001
13-15
Excel Graph of Residuals
0.2
0.1
Residual
0.0
-0.1
-0.2
-0.3
60 70 80 90 100
13-16
Nonlinear Residual Plot
0 X
13-17
Nonconstant Error Variance
0 X
0 X
13-18
Graphs of Nonindependent
Error Terms
0 X 0 X
13-19
Healthy Residual Plot
0 X
13-20
Standard Error of the Estimate
 
Sum of Squares Error
2
SSE   Y Y
  Y  b0  Y  b1  XY
2
Standard Error
of the
Estimate SSE
Se  n2
13-21
Determining SSE
Number of
Passengers Cost ($1,000) Residual
X Y Y  Yˆ (Y  Yˆ ) 2
61 4.28 .227 .05153

63 4.08 -.054 .00292
67 4.42 .123 .01513
69 4.17 -.208 .04326
70 4.48 .061 .00372
74 4.30 -.282 .07952
76 4.82 .157 .02465
81 4.70 -.167 .02789
86 5.11 .040 .00160
91 5.13 -.144 .02074
95 5.64 .204 .04162
97 5.56 .042 .00176
 (Y  Yˆ )  .001  (Y  Yˆ ) 2
=.31434
Sum of squares of error = SSE = .31434
13-22
Standard Error of the Estimate
Y Yˆ 
Sum of Squares Error
2
SSE  
Standard Error  0.31434

of the
Estimate SSE
Se  n  2
0.31434

10
 0.1773
13-23
Coefficient of Determination
  Y
2
SSYY   Y Y    Y
2

2
n
SSYY  exp lained var iation  un exp lained var iation
SSYY  SSR  SSE
SSR SSE
1 
SSYY SSYY
2 SSR
r  SSYY
SSE
 1
SSYY
SSE
 1
  0 r 1
2
2
Y
Y  n
2
13-24
Coefficient of Determination
SSE  0.31434
SSYY  Y 
Y
 270.9251 
2
 56.69
 3.11209
2 2
n 12
SSE
r  1
2
89.9% of the variability
SSYY of the cost of flying a
.31434 Boeing 737 is accounted for
 1 by the number of passengers.
3.11209
 .899
13-25
Hypothesis Tests for the Slope
of the Regression Model
b  1
t
H 0:  1  0
1
S b
H 1:  1  0 where: S 
S e
b
SSXX
H 0:  1  0 
SSE
S e
n2
H 1:  1  0
SSXX  
2

  X
2
X
H 0:  1  0 n
  the hypothesized slope
H 1:  1  0
1
df  n  2
13-26
Hypothesis Test: Airline Cost
Example (Part 1)
H 0:  1  0 df  n  2  10  2  10
  .05
H 1:  1  0  2.228
t .025,10
If | t | 2.228, reject H0
If  2.228  t  2.228, do not reject H0
13-27
Hypothesis Test: Airline Cost
Example (Part 2)
.0407  0
t
.1773
2
73,764 
(930)
12
 9.43
Since t  9.43  2.228, reject H0
13-28
Testing the Overall Model (Part 1)
H 0:  1  0
dfreg  k  1
dferr  n  k  1  12  1  1  10
H 1:  1  0   .05
F .05,1,10
 4.96
IfF  4.96, reject H0
If F  4.96, do not reject H0
13-29
Testing the Overall Model (Part 2)
ANOVA
df SS MS F Significance F
Regression 1 2.79803 2.79803 89.092179 2.7E-06
Residual 10 0.31406 0.03141
Total 11 3.11209
SSreg 2.7980
2.7980
F 1   89.09
dfreg MSreg 0.3141 0.03141
F  10
SSerr MSerr
dferr F = 89.09 > 4.96, reject H0
13-30
Point Estimation
Yˆ  1.57  0.0407 X
For X  73,
Yˆ  1.57  0.040773
 4.5411 or $4,541.10
13-31
Confidence Interval to Estimate Y :
1 X  X
Yˆ  t  , n  2 S e
 0  
2
2 n SSXX
where : X 0  a particular value of X
SSXX =  X 2

 X
2
n
For X 0  73 and a 95% confidence level ,
 73  77.5
2
4.5411  2.2280.1773
1

930 
2
12
73,764 
12
 4.5411  1220
4.4191  E Y 73  4.6631
13-32
Confidence Interval to Estimate the
Average Value of Y for some Values of X:
X Confidence Interval
62 4.0934 + .1876 3.9058 to 4.2810

68 4.3376 + .1461 4.1915 to 4.4837
73 4.5411 + .1220 4.4191 to 4.6631
85 5.0295 + .1349 4.8946 to 5.1644
90 5.2230 + .1656 5.0674 to 5.3986
13-33
Prediction Interval to Estimate Y
for a given value of X
ˆ 1 X 0 X
Y  t  ,n  2 S e 1  
 
2
2 n SSXX
where : X 0  a particular value of X
SSXX =  X
2

X
2
13-34
Confidence Intervals for Estimation
Regression Plot
6
5
Cost
4 Regression
95% CI
95% PI
60 70 80 90 100
13-35
MINITAB Regression Analysis of
the Airline Cost Example
The regression equation is
Cost = 1.57 + 0.0407 Number of Passengers
Predictor Coef StDev T P

Constant 1.5698 0.3381 4.64 0.001
Number o 0.040702 0.004312 9.44 0.000
S = 0.1772 R-Sq = 89.9% R-Sq(adj) = 88.9%
Analysis of Variance
Source DF SS MS F P
Regression 1 2.7980 2.7980 89.09 0.000
Residual Error 10 0.3141 0.0314
Total 11 3.1121
Obs Number o Cost Fit StDev Fit Residual St Resid

1 61.0 4.2800 4.0526 0.0876 0.2274 1.48
2 63.0 4.0800 4.1340 0.0808 -0.0540 -0.34
3 67.0 4.4200 4.2968 0.0683 0.1232 0.75
4 69.0 4.1700 4.3782 0.0629 -0.2082 -1.26
5 70.0 4.4800 4.4189 0.0605 0.0611 0.37
6 74.0 4.3000 4.5817 0.0533 -0.2817 -1.67
7 76.0 4.8200 4.6631 0.0516 0.1569 0.93
8 81.0 4.7000 4.8666 0.0533 -0.1666 -0.99
9 86.0 5.1100 5.0701 0.0629 0.0399 0.24
10 91.0 5.1300 5.2736 0.0775 -0.1436 -0.90
11 95.0 5.6400 5.4364 0.0912 0.2036 1.34
12 97.0 5.5600 5.5178 0.0984 0.0422 0.29
13-36
Pearson Product-Moment
Correlation Coefficient
SSXY
r
 SSX  SSY 

  X  X Y  Y 
  X  X   Y Y 
2 2
  X  Y 
 XY  n



  X
2

  Y 2 
Y  
2

1 r  1
2
 X n  n 
  
13-37
Three Degrees of Correlation
r<0 r>0
r=0
13-38

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Business Statistics, 4e

• Compute the equation of a simple regression line from a

• Correlation is a measure of the degree of

• bivariate (two variables) linear regression --

 Probabilistic Regression Model

 0 and 1 are population parameters

 0 and 1 are estimated by sample statistics b0 and b1

b = the sample slope

Yˆ = the predicted value of Y

61 4.28 3,721 261.08

Adjusted R Square 0.88899225

Standard Error 0.17721746

Regression 1 2.79803 2.79803 89.092179 2.7E-06

Residual 10 0.31406 0.03141

Coefficients Standard Error t Stat P-value

61 4.28 4.053 .227

61 4.28 .227 .05153

Sum of squares of error = SSE = .31434

Standard Error  0.31434

Since t  9.43  2.228, reject H0

Regression 1 2.79803 2.79803 89.092179 2.7E-06

Residual 10 0.31406 0.03141

62 4.0934 + .1876 3.9058 to 4.2810

Predictor Coef StDev T P

S = 0.1772 R-Sq = 89.9% R-Sq(adj) = 88.9%

Obs Number o Cost Fit StDev Fit Residual St Resid

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