Statistics for Business
and Economics
Anderson Sweeney
Williams
Slides by
John Loucks
St. Edward’s University
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Chapter 14, Part B
Simple Linear Regression
Using the Estimated Regression
Equation
for Estimation
Computer and Prediction
Solution
Residual Analysis: Validating Model
Assumptions
Residual Analysis: Outliers and Influential
Observations
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Using the Estimated Regression Equation
for Estimation and Prediction
Confidence Interval Estimate of
E(yp)
y p t / 2sy p
Prediction Interval Estimate of yp
yp t / 2sind
where:
confidence coefficient is 1 - and
t/2 is based on a t distribution
with n - 2 degrees of freedom
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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) = 25 cars
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Confidence Interval for E(yp)
yˆpof
Estimate of the Standard Deviation
1 (xp x)2
syˆp s
n (xi x)2
1 (3 2)2
syˆp 2.16025
5 (1 2)2 (3 2)2 (2 2)2 (1 2)2 (3 2)2
1 1
syˆp 2.16025 1.4491
5 4
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Confidence Interval for E(yp)
The 95% confidence interval estimate of the
mean number of cars sold when 3 TV ads
are run is:
y p t / 2sy p
25 + 3.1824(1.4491)
25 + 4.61
20.39 to 29.61 cars
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or duplicated, or posted to a publicly accessible website, in whole or in part.
Prediction Interval for yp
Estimate of the Standard
Deviation
of an Individual Value of yp
2
1 (xp x )
sind s 1
n (xi x)2
1 1
syˆp 2.16025 1
5 4
syˆp 2.16025(1.20416) 2.6013
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or duplicated, or posted to a publicly accessible website, in whole or in part.
Prediction Interval for yp
The 95% prediction interval estimate of the
number of cars sold in one particular week
when 3 TV ads are run is:
yp t / 2sind
25 + 3.1824(2.6013)
25 + 8.28
16.72 to 33.28 cars
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Computer Solution
Performing the regression analysis computations
without the help of a computer can be quite time
consuming.
On the next slide we show Minitab output for the
Reed Auto Sales example.
Recall that the independent variable was named Ads
and the dependent variable was named Cars in the
example.
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Computer Solution
The regression equation is
Cars = 10 + 5.00 Ads
Predictor Coef SE Coef T p
Constant 10.000 2.366 4.23 0.024
Ads 5.0000 1.0801 4.63 0.019
S = 2.2 R-sq = 87.7% R-sq(adj) = 83.6%
Analysis of Variance
SOURCE DF SS MS F p
Regression 1 100 100 21.43 0.019
Residual Error 3 14 4.667
Total 4 114
Predicted Values for New Observations
New
Obs Fit SE Fit 95% C.I. 95% P.I.
1 25.00 2.60 (20.39, 29.61) (16.72, 33.28)
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Minitab Output
Minitab prints the estimated regression equation as
Cars = 10.0 + 5.00 Ads.
For each of the coefficients b0 and b1, the output shows
its value, standard deviation, t value, and p-value.
Minitab prints the standard error of the estimate, s,
as well as information about the goodness of fit. .
The standard ANOVA table is printed.
Also provided are the 95% confidence interval
estimate of the expected number of cars sold and the
95% prediction interval estimate of the number of
cars sold for an individual weekend with 3 ads.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
Residual Analysis
If the assumptions about the error term e appear
questionable, the hypothesis tests about the
significance of the regression relationship and the
interval estimation results may not be valid.
The residuals provide the best information about e .
Residual for Observation i
yi yˆi
Much of the residual analysis is based on an
examination of graphical plots.
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Residual Plot Against x
If the assumption that the variance of e is the
same for all values of x is valid, and the
assumed regression model is an adequate
representation of the relationship between the
variables, then
The residual plot should give an overall
impression of a horizontal band of points
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Residual Plot Against x
y yˆ
Good Pattern
Residual
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Residual Plot Against x
y yˆ
Nonconstant Variance
Residual
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Residual Plot Against x
y yˆ
Model Form Not Adequate
Residual
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Residual Plot Against x
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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Residual Plot Against x
TV Ads Residual Plot
3
2
Residuals
1
0
-1
-2
-3
0 1 2 3 4
TV Ads
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Standardized Residuals
Standardized Residual for Observation i
yi yˆi
syi yˆi
where: syi yˆi s 1 hi
1 (xi x)2
hi
n (xi x)2
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Standardized Residual Plot
The standardized residual plot can provide
insight about the assumption that the error
term e has a normal distribution.
If this assumption is satisfied, the distribution
of the standardized residuals should appear to
come from a standard normal probability
distribution.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
Standardized Residual Plot
Standardized Residuals
Standardiz
Observati Predicted Residual ed
on y Residual
1 15 -1 -0.5345
2 25 -1 -0.5345
3 20 -2 -1.0690
4 15 2 1.0690
5 25 2 1.0690
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Standardized Residual Plot
Standardized Residual
Plot A B C D
1.5
28
Standard Residuals
29 1
RESIDUAL OUTPUT
30 0.5
31 Observation Predicted Y Residuals
Standard Residuals
0
32 1 15 -1 -0.534522
33 -0.5 0 2
10
25
20 30
-1 -0.534522
34 -1 3 20 -2 -1.069045
35 4 15 2 1.069045
-1.5
36 5 25 2 1.069045
Cars Sold
37
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Standardized Residual Plot
All of the standardized residuals are between –
1.5 and +1.5 indicating that there is no reason
to question the assumption that e has a normal
distribution.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
Outliers and Influential Observations
Detecting Outliers
• An outlier is an observation that is unusual
in comparison with the other data.
• Minitab classifies an observation as an
outlier if its standardized residual value is <
• -2 orstandardized
This > +2. residual rule sometimes
fails to identify an unusually large
observation as being an outlier.
• This rule’s shortcoming can be
circumvented by using studentized deleted
• residuals.
The |i th studentized deleted residual| will
be larger than the |i th standardized
residual|.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
End of Chapter 14, Part B
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied
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