Industrial Statistics 2

Simple Linear Regression

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc.

Chap 13-2

Learning Objectives
In this chapter, you learn:
How to use regression analysis to predict the value of
a dependent variable based on an independent
variable
The meaning of the regression coefficients b0 and b1
How to evaluate the assumptions of regression
analysis and know what to do if the assumptions are
violated
To make inferences about the slope and correlation
coefficient
To estimate mean values and predict individual values
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-3

Correlation vs. Regression

A scatter plot can be used to show the

relationship between two variables

Correlation analysis is used to measure the

strength of the association (linear relationship)
between two variables

Correlation is only concerned with strength of the

relationship

No causal effect is implied with correlation

Scatter plots were first presented in Ch. 2

Correlation was first presented in Ch. 3

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-4

Introduction to
Regression Analysis

Regression analysis is used to:

Predict the value of a dependent variable based on

the value of at least one independent variable

Explain the impact of changes in an independent

variable on the dependent variable

Dependent variable: the variable we wish to

predict or explain
Independent variable: the variable used to predict
or explain the dependent
variable

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-5

Simple Linear Regression

Model

Only one independent variable, X

Relationship between X and Y is

described by a linear function

Changes in Y are assumed to be related

to changes in X

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-6

Types of Relationships
Linear relationships
Y

Curvilinear relationships
Y

X
Y

X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

X
Chap 13-7

Types of Relationships
(continued)
Strong relationships
Y

Weak relationships
Y

X
Y

X
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X
Chap 13-8

Types of Relationships
(continued)
No relationship
Y

X
Y

X
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Chap 13-9

Simple Linear Regression

Model
Population
Y intercept
Dependent
Variable

Population
Slope
Coefficient

Independent
Variable

Random
Error
term

Yi 0 1Xi i
Linear component

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Random Error
component

Chap 13-10

Simple Linear Regression

Model

(continued)

Yi 0 1Xi i

Observed Value
of Y for Xi

Predicted Value
of Y for Xi

Slope = 1
Random Error
for this Xi value

Intercept = 0

Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

X
Chap 13-11

Simple Linear Regression

Equation (Prediction Line)
The simple linear regression equation provides an
estimate of the population regression line
Estimated
(or predicted)
Y value for
observation i

Estimate of
the regression

Estimate of the
regression slope

intercept

Yi b0 b1Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Value of X for
observation i

Chap 13-12

The Least Squares Method

b0 and b1 are obtained by finding the values of
that minimize the sum of the squared
differences between Y and Y :
2
2

min (Yi Yi ) min (Yi (b0 b1Xi ))

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-13

Finding the Least Squares

Equation

The coefficients b0 and b1 , and other

regression results in this chapter, will be
found using Excel or Minitab

Formulas are shown in the text for those

who are interested

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-14

Interpretation of the
Slope and the Intercept

b0 is the estimated average value of Y

when the value of X is zero

b1 is the estimated change in the

average value of Y as a result of a
one-unit change in X

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-15

Simple Linear Regression

Example

A real estate agent wishes to examine the

relationship between the selling price of a home
and its size (measured in square feet)

A random sample of 10 houses is selected

Dependent variable (Y) = house price in $1000s
Independent variable (X) = square feet

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-16

Simple Linear Regression

Example: Data
House Price in $1000s
(Y)

Square Feet
(X)

245

1400

312

1600

279

1700

308

1875

199

1100

219

1550

405

2350

324

2450

319

1425

255

1700

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-17

Simple Linear Regression

Example: Scatter Plot
House price model: Scatter Plot

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-18

Simple Linear Regression

Example: Using Excel

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-19

Simple Linear Regression

Example: Excel Output
Regression Statistics
Multiple R

0.76211

R Square

0.58082

Adjusted R Square

0.52842

Standard Error

house price 98.24833 0.10977 (square feet)

41.33032

Observations

ANOVA

The regression equation is:

10

df

SS

MS

F
11.0848

Regression

18934.9348

18934.9348

Residual

13665.5652

1708.1957

Total

32600.5000

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

Significance F
0.01039

Lower 95%

Upper 95%

98.24833

58.03348

1.69296

0.12892

-35.57720

232.07386

0.10977

0.03297

3.32938

0.01039

0.03374

0.18580

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-20

Simple Linear Regression

Example: Minitab Output
The regression
equation is:

The regression equation is

Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297

T
P
1.69 0.129
3.33 0.010

house price = 98.24833 +

0.10977 (square feet)

S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%

Analysis of Variance
Source
Regression
Residual Error
Total

DF
1
8
9

SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-21

Simple Linear Regression Example:

Graphical Representation
House price model: Scatter Plot and Prediction Line

Slope
= 0.10977

Intercept
= 98.248

house price 98.24833 0.10977 (square feet)

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-22

Simple Linear Regression

Example: Interpretation of bo
house price 98.24833 0.10977 (square feet)

b0 is the estimated average value of Y when the

value of X is zero (if X = 0 is in the range of
observed X values)

Because a house cannot have a square footage

of 0, b0 has no practical application

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-23

Simple Linear Regression

Example: Interpreting b1
house price 98.24833 0.10977 (square feet)

b1 estimates the change in the average

value of Y as a result of a one-unit
increase in X

Here, b1 = 0.10977 tells us that the mean value of a

house increases by .10977($1000) = $109.77, on
average, for each additional one square foot of size

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-24

Simple Linear Regression

Example: Making Predictions
Predict the price for a house
with 2000 square feet:

house price 98.25 0.1098 (sq.ft.)

98.25 0.1098(200 0)
317.85
The predicted price for a house with 2000
square feet is 317.85($1,000s) = $317,850
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-25

Simple Linear Regression

Example: Making Predictions

When using a regression model for prediction,

only predict within the relevant range of data
Relevant range for
interpolation

Do not try to
extrapolate
beyond the range
of observed Xs
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-26

Measures of Variation

Total variation is made up of two parts:

SST

SSR

Total Sum of
Squares

Regression Sum
of Squares

SST ( Yi Y )2

SSR ( Yi Y )2

SSE
Error Sum of
Squares

SSE ( Yi Yi )2

where:

= Mean value of the dependent variable

Yi = Observed value of the dependent variable

Yi = Predicted value of Y for the given X value

i
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-27

Measures of Variation
(continued)

SST = total sum of squares

Measures the variation of the Yi values around their

mean Y

SSR = regression sum of squares (Explained Variation)

(Total Variation)

Variation attributable to the relationship between X

and Y

SSE = error sum of squares (Unexplained Variation)

Variation in Y attributable to factors other than X

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-28

Measures of Variation
(continued)

Y
Yi

SSE = (Yi - Yi )2

SST = (Yi - Y)2

_
SSR = (Yi - Y)2

Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

_
Y

X
Chap 13-29

Coefficient of Determination, r2

The coefficient of determination is the portion

of the total variation in the dependent variable
that is explained by variation in the
independent variable
The coefficient of determination is also called
r-squared and is denoted as r2
SSR regression sum of squares
r

SST
total sum of squares
2

note:
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

0 r 1
2

Chap 13-30

Examples of Approximate
r2 Values
Y
r2 = 1

r2 = 1

100% of the variation in Y is

explained by variation in X

r =1
2

Perfect linear relationship

between X and Y:

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-31

Examples of Approximate
r2 Values
Y
0 < r2 < 1

Weaker linear relationships

between X and Y:
Some but not all of the
variation in Y is explained
by variation in X

X
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-32

Examples of Approximate
r2 Values
r2 = 0

No linear relationship
between X and Y:

r2 = 0

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

The value of Y does not

depend on X. (None of the
variation in Y is explained
by variation in X)

Chap 13-33

Simple Linear Regression Example:

Coefficient of Determination, r2 in Excel
SSR 18934.9348
r

0.58082
SST 32600.5000
2

Regression Statistics
Multiple R

0.76211

R Square

0.58082

Adjusted R Square

0.52842

Standard Error

41.33032

Observations

ANOVA

58.08% of the variation in

house prices is explained by
variation in square feet

10

df

SS

MS

F
11.0848

Regression

18934.9348

18934.9348

Residual

13665.5652

1708.1957

Total

32600.5000

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

Significance F
0.01039

Lower 95%

Upper 95%

98.24833

58.03348

1.69296

0.12892

-35.57720

232.07386

0.10977

0.03297

3.32938

0.01039

0.03374

0.18580

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-34

Simple Linear Regression Example:

Coefficient of Determination, r2 in Minitab
The regression equation is
Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297

T
P
1.69 0.129
3.33 0.010

S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%

r2

Analysis of Variance
Source
Regression
Residual Error
Total

DF
1
8
9

SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

SSR 18934.9348

0.58082
SST 32600.5000

58.08% of the variation in

house prices is explained
by variation in square feet
Chap 13-35

Standard Error of Estimate

The standard deviation of the variation of

observations around the regression line is
estimated by
n

SSE
S YX

n2

i 1

(Yi Yi ) 2
n2

Where
SSE = error sum of squares
n = sample size
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-36

Simple Linear Regression Example:

Standard Error of Estimate in Excel
Regression Statistics
Multiple R

0.76211

R Square

0.58082

Adjusted R Square

0.52842

Standard Error

41.33032

Observations

ANOVA

S YX 41.33032

10

df

SS

MS

F
11.0848

Regression

18934.9348

18934.9348

Residual

13665.5652

1708.1957

Total

32600.5000

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

Significance F
0.01039

Lower 95%

Upper 95%

98.24833

58.03348

1.69296

0.12892

-35.57720

232.07386

0.10977

0.03297

3.32938

0.01039

0.03374

0.18580

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-37

Simple Linear Regression Example:

Standard Error of Estimate in Minitab
The regression equation is
Price = 98.2 + 0.110 Square Feet
Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297

T
P
1.69 0.129
3.33 0.010

S = 41.3303 R-Sq = 58.1% R-Sq(adj) = 52.8%

S YX 41.33032

Analysis of Variance
Source
Regression
Residual Error
Total

DF
1
8
9

SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-38

Comparing Standard Errors

SYX is a measure of the variation of observed
Y values from the regression line
Y

small SYX

large SYX

The magnitude of SYX should always be judged relative to the

size of the Y values in the sample data
i.e., SYX = $41.33K is moderately small relative to house prices in
the $200K - $400K range
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-39

Assumptions of Regression
L.I.N.E

Linearity
The relationship between X and Y is linear
Independence of Errors
Error values are statistically independent
Normality of Error
Error values are normally distributed for any given
value of X
Equal Variance (also called homoscedasticity)
The probability distribution of the errors has constant
variance

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-40

Residual Analysis
ei Yi Yi

The residual for observation i, ei, is the difference

between its observed and predicted value

Check the assumptions of regression by examining the

residuals

Examine for linearity assumption

Evaluate independence assumption

Evaluate normal distribution assumption

Examine for constant variance for all levels of X

(homoscedasticity)

Graphical Analysis of Residuals

Can plot residuals vs. X

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Chap 13-41

Residual Analysis for Linearity

Y

Not Linear
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residuals

residuals

Linear
Chap 13-42

Residual Analysis for

Independence
Not Independent

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

residuals

residuals

residuals

Independent
X

Chap 13-43

Checking for Normality

Examine the Stem-and-Leaf Display of the

Residuals
Examine the Boxplot of the Residuals
Examine the Histogram of the Residuals
Construct a Normal Probability Plot of the
Residuals

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-44

Residual Analysis for Normality

When using a normal probability plot, normal
errors will approximately display in a straight line
Percent

100

0
-3

-2

-1

Residual
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Chap 13-45

Residual Analysis for

Equal Variance
Y

x
Non-constant variance

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

residuals

residuals

Constant variance
Chap 13-46

Simple Linear Regression

Example: Excel Residual Output
RESIDUAL OUTPUT
Predicted
House Price

Residuals

251.92316

-6.923162

273.87671

38.12329

284.85348

-5.853484

304.06284

3.937162

218.99284

-19.99284

268.38832

-49.38832

356.20251

48.79749

367.17929

-43.17929

254.6674

64.33264

10

284.85348

-29.85348

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Does not appear to violate

any regression assumptions

Chap 13-47

Measuring Autocorrelation:
The Durbin-Watson Statistic

Used when data are collected over time to

detect if autocorrelation is present

Autocorrelation exists if residuals in one

time period are related to residuals in
another period

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-48

Autocorrelation

Autocorrelation is correlation of the errors

(residuals) over time

Here, residuals show a

cyclic pattern, not
random. Cyclical
patterns are a sign of
positive autocorrelation

Violates the regression assumption that

residuals are random and independent

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-49

The Durbin-Watson Statistic

The Durbin-Watson statistic is used to test for

autocorrelation
H0: residuals are not correlated
H1: positive autocorrelation is present
n

(e e
i 2

i 1

2
e
i
i1

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

The possible range is 0 D 4

D should be close to 2 if H0 is true
D less than 2 may signal positive
autocorrelation, D greater than 2 may
signal negative autocorrelation
Chap 13-50

Testing for Positive

Autocorrelation
H0: positive autocorrelation does not exist
H1: positive autocorrelation is present
Calculate the Durbin-Watson test statistic = D
(The Durbin-Watson Statistic can be found using Excel or Minitab)

Find the values dL and dU from the Durbin-Watson table

(for sample size n and number of independent variables k)

Decision rule: reject H0 if D < dL

Reject H0

0
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Inconclusive

dL

Do not reject H0

dU

2
Chap 13-51

Testing for Positive

Autocorrelation

(continued)

Suppose we have the following time series data:

Is there autocorrelation?

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-52

Testing for Positive

Autocorrelation

(continued)

Example with n = 25:

Excel/PHStat output:
Durbin-Watson Calculations
Sum of Squared
Difference of Residuals

3296.18

Sum of Squared
Residuals

3279.98

Durbin-Watson
Statistic

1.00494
n

(e e
i 2

ei

i1

)2

3296.18
1.00494
3279.98

i 1

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-53

Testing for Positive

Autocorrelation

(continued)

Here, n = 25 and there is k = 1 one independent variable

Using the Durbin-Watson table, dL = 1.29 and dU = 1.45

D = 1.00494 < dL = 1.29, so reject H0 and conclude that

significant positive autocorrelation exists
Decision: reject H0 since
D = 1.00494 < dL
Reject H0

Inconclusive

dL=1.29

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Do not reject H0

dU=1.45

2
Chap 13-54

Inferences About the Slope

The standard error of the regression slope

coefficient (b1) is estimated by

S YX
Sb1

SSX

S YX

(X X)

where:

Sb1

= Estimate of the standard error of the slope

S YX

SSE

= Standard error of the estimate

n2

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-55

Inferences About the Slope:

t Test

t test for a population slope

Null and alternative hypotheses

Is there a linear relationship between X and Y?

H 0 : 1 = 0
H 1 : 1 0

(no linear relationship)

(linear relationship does exist)

Test statistic

t STAT

b1 1
Sb

d.f. n 2
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

where:
b1 = regression slope
coefficient
1 = hypothesized slope
Sb1 = standard
error of the slope
Chap 13-56

Inferences About the Slope:

t Test Example
House Price
in $1000s
(y)

Square Feet
(x)

245

1400

312

1600

279

1700

308

1875

199

1100

219

1550

405

2350

324

2450

319

1425

255

1700

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Estimated Regression Equation:

house price 98.25 0.1098 (sq.ft.)

The slope of this model is 0.1098

Is there a relationship between the
square footage of the house and its
sales price?

Chap 13-57

Inferences About the Slope:

t Test Example
H0: 1 = 0
H1: 1 0

From Excel output:

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

98.24833

58.03348

1.69296

0.12892

0.10977

0.03297

3.32938

0.01039

From Minitab output:

b1

Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297

T
P
1.69 0.129
3.33 0.010

b1

Sb1

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Sb1

t STAT

b1 1
Sb

0.10977 0
3.32938
0.03297

Chap 13-58

Inferences About the Slope:

t Test Example
Test Statistic: tSTAT = 3.329

H0: 1 = 0
H1: 1 0

d.f. = 10- 2 = 8
/2=.025

Reject H0

/2=.025

Do not reject H0

-t/2
-2.3060

Reject H0

t/2
2.3060

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

3.329

Decision: Reject H0
There is sufficient evidence
that square footage affects
house price

Chap 13-59

Inferences About the Slope:

H: =0
t Test Example
0

H1: 1 0
From Excel output:
Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

98.24833

58.03348

1.69296

0.12892

0.10977

0.03297

3.32938

0.01039

From Minitab output:

Predictor
Coef
SE Coef
Constant
98.25
58.03
Square Feet 0.10977 0.03297

T
P
1.69 0.129
3.33 0.010

p-value

Decision: Reject H0, since p-value <

There is sufficient evidence that
square footage affects house price.
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-60

F Test for Significance

F Test statistic:
where

MSR
FSTAT
MSE
MSR

SSR
k

MSE

SSE
n k 1

where FSTAT follows an F distribution with k numerator and (n k - 1)

denominator degrees of freedom
(k = the number of independent variables in the regression model)
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-61

F-Test for Significance

Excel Output
Regression Statistics
Multiple R

0.76211

R Square

0.58082

Adjusted R Square

0.52842

Standard Error

41.33032

Observations

ANOVA

MSR 18934.9348
FSTAT

11.0848
MSE 1708.1957

10

df

With 1 and 8 degrees

of freedom
SS

MS

F
11.0848

Regression

18934.9348

18934.9348

Residual

13665.5652

1708.1957

Total

32600.5000

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

p-value for
the F-Test
Significance F
0.01039

Chap 13-62

F-Test for Significance

Minitab Output

Analysis of Variance
Source
Regression
Residual Error
Total

DF
1
8
9

SS
MS
F
P
18935 18935 11.08 0.010
13666 1708
32600

With 1 and 8 degrees

of freedom

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

FSTAT

p-value for
the F-Test

MSR 18934.9348

11.0848
MSE 1708.1957

Chap 13-63

F Test for Significance

(continued)

Test Statistic:

H 0 : 1 = 0
H 1 : 1 0
= .05
df1= 1

FSTAT
df2 = 8

Decision:
Reject H0 at = 0.05

Critical
Value:
F = 5.32

Conclusion:

= .05

Do not
reject H0

Reject H0

MSR
11.08
MSE

There is sufficient evidence that

house size affects selling price

F.05 = 5.32

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-64

Confidence Interval Estimate

for the Slope
Confidence Interval Estimate of the Slope:

b1 t / 2 S b

d.f. = n - 2

Excel Printout for House Prices:

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

98.24833

58.03348

1.69296

0.12892

-35.57720

232.07386

0.10977

0.03297

3.32938

0.01039

0.03374

0.18580

At 95% level of confidence, the confidence interval for

the slope is (0.0337, 0.1858)
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-65

Confidence Interval Estimate

for the Slope

(continued)

Coefficients
Intercept
Square Feet

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

98.24833

58.03348

1.69296

0.12892

-35.57720

232.07386

0.10977

0.03297

3.32938

0.01039

0.03374

0.18580

Since the units of the house price variable is

$1000s, we are 95% confident that the average
impact on sales price is between $33.74 and
$185.80 per square foot of house size
This 95% confidence interval does not include 0.
Conclusion: There is a significant relationship between
house price and square feet at the .05 level of significance
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-66

t Test for a Correlation Coefficient

Hypotheses
H0: = 0 (no correlation between X and Y)
H1: 0 (correlation exists)

Test statistic

r -

t STAT
(with n
2 degrees of freedom)
2
1 r
n2

where
r r 2 if b1 0
r r 2 if b1 0

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-67

t-test For A Correlation Coefficient

(continued)

Is there evidence of a linear relationship

between square feet and house price at
the .05 level of significance?
H0: = 0

(No correlation)

H1: 0

(correlation exists)

=.05 , df = 10 - 2 = 8

t STAT

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

r
1 r2
n2

.762 0
1 .762 2
10 2

3.329

Chap 13-68

t-test For A Correlation Coefficient

(continued)

t STAT

r
1 r2
n2

.762 0
1 .762 2
10 2

3.329

Conclusion:
There is
evidence of a
linear association
at the 5% level of
significance

d.f. = 10-2 = 8
/2=.025

Reject H0

-t/2
-2.3060

/2=.025

Do not reject H0

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Decision:
Reject H0

Reject H0

t/2
2.3060

3.329

Chap 13-69

Estimating Mean Values and

Predicting Individual Values
Goal: Form intervals around Y to express
uncertainty about the value of Y for a given Xi
Confidence
Interval for
the mean of
Y, given Xi

Y = b0+b1Xi

Prediction Interval
for an individual Y,
given Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Xi

Chap 13-70

Confidence Interval for

the Average Y, Given X
Confidence interval estimate for the
mean value of Y given a particular Xi
Confidence interval for Y|X X :
i

Y t / 2 S YX hi
Size of interval varies according
to distance away from mean, X

1 (Xi X)2 1
(Xi X)2
hi

n
SSX
n (Xi X)2
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-71

Prediction Interval for

an Individual Y, Given X
Confidence interval estimate for an
Individual value of Y given a particular Xi
Confidence interval for YX X :
i

Y t / 2 S YX 1 hi

This extra term adds to the interval width to reflect

the added uncertainty for an individual case

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-72

Estimation of Mean Values:

Example
Confidence Interval Estimate for Y|X=X

Find the 95% confidence interval for the mean price

of 2,000 square-foot houses

Predicted Price Yi = 317.85 ($1,000s)

1
t
Y
S

0.025 YX
n

(X i X) 2

(X i X) 2

317.85 37.12

The confidence interval endpoints are 280.66 and 354.90,

or from $280,660 to $354,900
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-73

Estimation of Individual Values:

Example
Prediction Interval Estimate for YX=X

Find the 95% prediction interval for an individual

house with 2,000 square feet

Predicted Price Yi = 317.85 ($1,000s)

1
t
Y
S
1

0.025 YX
n

(X i X) 2

(X i X) 2

317.85 102.28

The prediction interval endpoints are 215.50 and 420.07,

or from $215,500 to $420,070
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-74

Finding Confidence and

Prediction Intervals in Excel

From Excel, use

PHStat | regression | simple linear regression

Check the
confidence and prediction interval for X=
box and enter the X-value and confidence level
desired

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-75

Finding Confidence and

Prediction Intervals in Excel

(continued)

Input values

Y
Confidence Interval Estimate for Y|X=Xi
Prediction Interval Estimate for YX=Xi
Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-76

Finding Confidence and

Prediction Intervals in Minitab
Confidence Interval Estimate for Y|X=Xi
Predicted Values for New Observations
New
Obs Fit SE Fit
95% CI
95% PI
1 317.8 16.1 (280.7, 354.9) (215.5, 420.1)

Values of Predictors for New Observations

New Square
Obs Feet
1
2000

Input values

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Prediction Interval Estimate for YX=Xi

Chap 13-77

Pitfalls of Regression Analysis

Lacking an awareness of the assumptions

underlying least-squares regression
Not knowing how to evaluate the assumptions
Not knowing the alternatives to least-squares
regression if a particular assumption is violated
Using a regression model without knowledge of
the subject matter
Extrapolating outside the relevant range

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-78

Strategies for Avoiding

the Pitfalls of Regression

Start with a scatter plot of X vs. Y to observe

possible relationship
Perform residual analysis to check the
assumptions

Plot the residuals vs. X to check for violations of

assumptions such as homoscedasticity
Use a histogram, stem-and-leaf display, boxplot,
or normal probability plot of the residuals to
uncover possible non-normality

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-79

Strategies for Avoiding

the Pitfalls of Regression

(continued)

If there is violation of any assumption, use

alternative methods or models
If there is no evidence of assumption violation,
then test for the significance of the regression
coefficients and construct confidence intervals
and prediction intervals
Avoid making predictions or forecasts outside
the relevant range

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-80

Chapter Summary

Introduced types of regression models

Reviewed assumptions of regression and
correlation
Discussed determining the simple linear
regression equation
Described measures of variation
Discussed residual analysis
Addressed measuring autocorrelation

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-81

Chapter Summary
(continued)

Described inference about the slope

Discussed correlation -- measuring the strength
of the association
Addressed estimation of mean values and
prediction of individual values
Discussed possible pitfalls in regression and
recommended strategies to avoid them

Basic Business Statistics, 11e 2009 Prentice-Hall, Inc..

Chap 13-82