Unit 4: Linear Regression

Overview:

Managerial decisions are often based on the relationship between two or more variables.
Sometimes a manager will rely on intuition to judge how two variables are related. However, if
data can be obtained, a statistical procedure called regression analysis can be used to develop
an equation showing how the variables are related. In regression terminology, the variables being
predicted is called the dependent variables or responses and the variables being used to predict
the value of dependent variables are called the independent variables or predictor variables.

Regression analysis involving one independent variable and one dependent variable is
referred to as a simple regression and in statistical notation y denotes the dependent variable and
x the independent variable. A regression analysis for which any one unit change in the
independent variable, x, is assumed to result in the same change in the dependent variable y is
referred to as a linear regression. Regression analysis involving two or more independent
variables is called multiple regression.

Learning Objectives:
After successful completion of this module, you should be able to:
• Understand how regression analysis can be used to determine how a dependent and is
related to independent variable.
• Incorporate categorical independent variables into a regression model.
• Apply different analytics modelling concepts on enterprise.

Course Materials:

The Simple Linear Regression Model

To develop better work schedules, the manager wants to estimate the total daily travel
times for their drivers (denoted by y) and the number of miles traveled (denoted by x). Using the
regression analysis,, we can develop an equation showing how the dependent variable y is related
to the independent variable x.

Regression Model and Regression Equation

For every driving assignment in the population-see table 4.1. There is as value of x (miles
traveled) and a corresponding value to y (travel time in hours). The equation that describe how y
is related to x and an error term is called the regression model. The regression model used in
simple linear regression follows:

3.1

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 are characteristics of the population and so are referred to as the parameters of
the model and e is a random variable referred to as the error term. The error term accounts for
the variability in y that cannot be explained by the linear relationship between x and y.

The equation that describes how the expected value of y, denoted E(y) is related to x is
called the regression equation. The regression equation for simple linear regression follows:

3.2

Where E(y/x) is the expected value of y for a given value of x.

Table 3.1

Estimated Regression Equation

If the value of the population parameters were known, we could use equation
(4.2) to compute the mean value of y for a given value of x. The estimated regression equation
for simple linear regression follows:

3.3

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 Figure 3.1

Using Excel’s Chart Tools to Compute the Estimated Regression Equation

Based on Table 4.1 we can use excel chart tools to compute for the estimation equation
of the scatter chart – see Figure 4.1 scatter chart. The following steps describes how to compute
the estimated regression equation using the data in the worksheet.

Step 1. Right click on any data point in the scatter chart and select Add Trendline.

Step 2. When the Format Trendline task pane appears:

Select Linear in the Trendline Options area

Select Display Equation on chart in the Trendline Options area

Figure 3.2 shows the original data, scatter chart, estimated regression line and estimated
regression equation.

Figure 3.2

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 Least Squares Method

The least squares method is a procedure for using sample data to find the estimated
regression. Figure 3.1 is a scatter chart of data in table 3.1. Miles traveled is shown on the
horizontal axis, and travel time (in hours) is shown on the vertical axis. Scatter charts for
regression analysis are constructed with the independent variable x on the horizontal ais and the
dependent variable y on the vertical axis.

Multiple Regression Model

The study of how a dependent variable y is related to two or more independent variables.

Regression Model and Regression Equation

In the
multiple

3.4

regression model, b0, b1, b2, . . . , bq are the parameters and the error term is a random variable.
A close examination of this model reveals that y is a linear function of x1, x2, . . . ,xq
plus the error term . As in simple regression, the error term accounts for the variability in y
that cannot be explained by the linear effect of the q independent variables. The interpretation of
the y-intercept b0 in multiple regression is similar to the interpretation in simple regression; in a
multiple regression model, b0 is the mean of the dependent variable y when all of the independent
variables x1, x2, . . . ,xq are equal to zero.

Estimated Multiple Regression Equation

The estimated multiple regression equation.

3.5

Using Excel’s Regression Tool to Develop the Estimated Multiple Regression Equation

Steps to use Excel’s Regression tool to compute the estimated equation using the data
in the worksheet.

Step 1. Click the DATA tab in the Ribbon

Step 2. Click Data Analysis in the Analysis group

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 Step 3. Select Regression from the list of Analysis Tools in the Data Analysis tools box
(shown in Figure 4.4) and click OK.

Step 4. When the Regression dialog box appears (as shown in Figure 3.4):

Enter D1:D301 in the Input Y Range: box

Enter B1:C301in the Input X Range: box

Select Labels

Selecting Labels tells Excel to use the names you have given to your variables in
Row 1 when displaying the regression model output.

Select Confidence Level:

Enter 99 in the Confidence Level: box

Select New Worksheet Ply:

Click OK
Figure 3.3

Note:

• Selecting New Worksheet Ply: tells Excel to place the output of the regression analysis in a
new work- sheet. In the adjacent box, you can specify the name of the worksheet where the
output is to be placed, or you can leave this blank and allow Excel to create anew worksheet
to use as the destination for the results of this regression analysis (as we are doing here).

• If Data Analysis does not appear in your Analysis group, you will have to load the Analysis
ToolPak Add-in into Excel. To do so, click the FILE tab in the Ribbon, and click Options. When
the Excel Options dialog box appears, click Add-Ins from the menu.
Next to Manage:, select Excel Add-ins, and click Go. . . at the bottom of the dialog box.
When the Add- Ins dialog box appears, select Analysis ToolPakand click OK.

FUNDAMENTALS OF DESCRIPTIVE ANALYTICS (BUMA 30063) 63

 Figure 3.4

Figure 3.5

In the Excel output shown in Figure, the label for the independent variable x1 is Miles (see
cell A18) and the label for the independent variable x2 is Deliveries (see cell A19) The estimated
regression equation is
3.6

We interpret this model in the following manner:

• For a fixed number of deliveries, we estimate that the mean travel time will increase by

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 0.0672 hours when the traveled increase by 1 mile

• For a fixed distance traveled,we estimate that the mean travel time will increase by 0.69
hours when the number of deliveries increases by 1 delivery.

Inference and Regression

Statistical inference is the process of makingestimatesanddrawingconclusions about

one ore more characteristics of a population (the value of one or more parameters) through the
analysis of sample data drawn from the population.

Categorical Independent Variables

In the preceding example involved quantitative independent variable such as distance
traveled and number to deliveries. In categorical we must also work of independent variable such
as gender (male and female) method of payment (cash, credit card, check) and others the new
type pf variable called dummy variable. We define the following variable based on Butler Trucking
Company:

The categorical
variable for the
Butler Trucking
Company example had two levels: (1) driving assignments that include travel on the congested
segment of highway during the afternoon rush hour period and (2) driving assignments that do
not. A dummy variable withavalueofzeroindicatingadrivingassignmentthatdoesnot include travel
on the congested segment of highway during the afternoon rush hour period and a value of one

Figure 3.7

indicating a driving assignment that includes such travel was sufficient. See figure below that
included the congested segment and not by preparing histogram.

Read: Chapter 4 - Camm, J., Cochran, Fry, Ohlmann, Anderson, Sweeney, Williams. (2015).
Essentials of Business Analytics. Stamford, USA: Cengage Learning.

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