School of studies of Management,

Jiwaji university Gwalior (M.P.)

Mba1st Sem.
Subject: managerial economics
Unit-1

Learning outcomes
L01: Understand the concept of regression analysis.
L02: Describe the types of regression analysis.
LO3: Describe the measurements of regression analysis.
 REGRESSION ANALYSIS

Regression technique is a statistical technique that helps in qualifying the

relationship between the interrelated economic variables. The first step involves
estimating the coefficient of the independent variable and then measuring the
reliability of the estimated coefficient. This requires formulating a hypothesis,
and based on the hypothesis, we can create a function.
If a manager wants to determine the relationship between the firm’s
advertisement expenditures and its sales revenue, he will undergo the test of
hypothesis. Assuming that higher advertising expenditures lead to higher sale
for a firm. The manager collects data on advertising expenditure and on sales
revenue in a specific period of time. This hypothesis can be translated into the
mathematical function, where it leads to: Y = A + Bx

Where Y is sales, x is the advertisement expenditure, A and B are constant.

After translating the hypothesis into the function, the basis for this is to find the
relationship between the dependent and independent variables. The value of
dependent variable is of most importance to researchers and depends on the
value of other variables. Independent variable is used to explain the variation in
the dependent variable. It can be classified into two types:

a) Simple regression: One independent variable

b) Multiple regressions: Several independent variables.

A simple linear regression analysis -can be used for measuring the effect that
one attribute has on another and for predicting one attribute by means of
another. However, this is possible only if both variables are interval scaled and
normal distributed. A simple linear regression analysis should always be chosen
over a bivariate correlation analysis when drawing conclusions about the
assumed direction of the correlation. In contrast to a multiple regression analysis
with several independent variables, a simple linear regression analysis
examines the influence an independent variable has on the dependent variable
Simple Regression Following are the steps to build up regression analysis:
Specify the regression mode
l• Obtain data on variables

• Estimate the quantitative relationships

• Test the statistical significance of the results

• Usage of results in decision making

Formula for simple regression is: Y = a + bX + u
Y= dependent variable
X= independent variable
a= intercept
b= slope
u=random
Factor Cross sectional data provides information on a group of entities at a
given time, whereas time series data provides information on one entity over
time. When we estimate regression equation it involves the process of finding
out the best linear relationship between the dependent and the independent
variables.
Method of Ordinary Least Squares (OLS)
Ordinary least square method is designed to fit a line through a scatter of points
is such a way that the sum of the squared deviations of the points from the line
is minimized. It is a statistical method. Usually Software packages perform OLS
estimation.
Y = a + bX
Co-efficientof Determination (R2) Co-efficient of determination is a measure
which indicates the percentage of the variation in the dependent variable is due
to the variations in the independent variables. R2 is a measure of the goodness
of fit model. Following are the methods:
Total Sum of Squares (SST) Sum of the squared deviations of the sample
values of Y from the mean of Y.

TSS = SUM ( Yi − Y) 2
Yi = dependent variables
Y = mean of dependent variables
i = number of observations
Regression Sum of Squares(SSR) Sum of the squared deviations of the
estimated values of Y from the mean of Y.

RSS = SUM ( Ỷi − uY) 2

Ỷi = estimated value of Y
Y = mean of dependent variables
i = number of variations
Error Sum of Squares (SSE) Sum of the squared deviations of the sample
values of Y from the estimated values of Y.
ESS = SUM ( Yi − Ỷi) 2
Ỷi = estimated value of Y
Yi = dependent variables
i = number of observations
R2 = RSS /TSS = 1 – ESS/ TSS

R 2 measures the proportion of the total deviation of Y from its mean which is
explained by the regression model. The closer the R 2 is to unity, the greater the
explanatory power of the regression equation. An R 2 close to 0 indicates that
the regression equation will have very little explanatory power.
If R2 = 1 the total deviation in Y from its mean is explained by the equation.
If R2 = 0 the regression equation does not account for any of the variation of Y
from its mean.
For evaluating the regression coefficients, a sample from the population is used
rather than the entire population. It is important to make assumptions about the
population based on the sample and to make a judgment about how good these
assumptions are.
Evaluating the Regression Coefficients Each sample from the population
generates its own intercept. To calculate the statistical difference following
methods can be used:
Two tailed test: Null Hypothesis: H0: b = 0
Alternative Hypothesis: Ha: b ≠0
One tailed test:

Null Hypothesis: H0: b › 0 (or b ‹ 0)

Alternative Hypothesis: Ha: b ‹ 0 (or b › 0)
Statistic Test: t = (b − E(b))/ SEb
b = estimated coefficient
E (b) = b = 0 (Null hypothesis)
SEb = Standard error of the coefficient
Value of t depends on the degree of freedom, one or two failed test, and level of
significance. To determine the critical value of t, t-table can be used. Then
comes the comparison of the t-value with the critical value. One needs to reject
the null hypothesis if the absolute value of the statistic test is greater than or
equal to the critical t-value. Do not reject the null hypothesis, I the absolute value
of the statistic test is less than the critical t–value.

Multiple Regression Analysis

Multiple regression analysis Unlike simple regression in multiple regression
analysis, the coefficients indicate the change in dependent variables assuming
the values of the other variables are constant. The test of statistical significance
is called F-test. The F-test is useful as it measures the statistical significance of
the entire regression equation rather than just for an individual. Here In null
hypothesis, there is no relationship between the dependent variable and the
independent variables of the population.
The formula is: H0: b1 = b2 = b3 = …. = bk = 0
No relationship exists between the dependent variable and the k independent
variables for the population.

F-test static:
F = ( R 2 k ) /(1 − R2) /(n − k − 1)
Critical value of F depends on the numerator and denominator degree of
freedom and level of significance. F-table can be used to determine the critical
F–value. In comparison to F–value with the critical value (F*):

If F › F*, we need to reject the null hypothesis.

If F ‹ F*, do not reject the null hypothesis as there is no significant relationship
between the dependent variable and all independent variables.