Simple Linear Regression

 Simple Linear Regression Model

 Ordinary Least Square (OLS) Method

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
1
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression

 Managerial decisions often are based on the

relationship between two or more variables.
 Regression analysis can be used to develop an
equation showing how the variables are related.
 The variable being predicted is called the dependent
variable and is denoted by y.
 The variables being used to predict the value of the
dependent variable are called the independent
variables and are denoted by x.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
2
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression

 Simple linear regression involves one independent

variable and one dependent variable.
 The relationship between the two variables is
approximated by a straight line.
 Regression analysis involving two or more
independent variables is called multiple regression.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
3
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Types of Relationships

(continued)
Strong relationships Weak relationships

Y Y

X X

Y Y

X Reserved. May not be scanned, copied

© 2014 Cengage Learning. All Rights
Slide
4
X
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Types of Relationships

(continued)
No relationship

© 2014 Cengage Learning. All Rights Reserved. May not beXscanned, copied
Slide
5
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression Model

 The equation that describes how y is related to x and

an error term is called the regression model.
 The simple linear regression model is:

y = b0 + b1x +e

where:
b0 and b1 are called parameters of the model,
e is a random variable called the error term.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
6
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression Equation

 The simple linear regression equation is:

E(y) = 0 + 1x

• Graph of the regression equation is a straight line.

• b0 is the y intercept of the regression line.
• b1 is the slope of the regression line.
• E(y) is the expected value of y for a given x value.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
7
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression Equation

 Positive Linear Relationship

E(y)

Regression line

Intercept Slope b1
b0
is positive

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
8
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression Equation

 Negative Linear Relationship

E(y)

Intercept
b0 Regression line

Slope b1
is negative

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
9
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression Equation

 No Relationship

E(y)

Intercept Regression line

b0
Slope b1
is 0

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
10
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Estimated Simple Linear Regression Equation

 The estimated simple linear regression equation

ŷ  b0  b1 x

• The graph is called the estimated regression line.

• b0 is the y intercept of the line.
• b1 is the slope of the line.
• ŷ is the estimated value of y for a given x value.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
11
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Estimation Process

Regression Model Sample Data:

y = b0 + b1x +e x y
Regression Equation x1 y1
E(y) = b0 + b1x . .
Unknown Parameters . .
b0, b1 xn y n

Estimated
b0 and b1 Regression Equation
provide estimates of ŷ  b0  b1 x
b0 and b1 Sample Statistics
b0, b1

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
12
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Least Squares Method

 Least Squares Criterion

min  (y i  y i ) 2

where:
yi = observed value of the dependent variable
for the ith observation
y^i = estimated value of the dependent variable
for the ith observation

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
13
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Least Squares Method

 Slope for the Estimated Regression Equation

b1   ( x  x )( y  y )
i i

 (x  x ) i
2

where:
xi = value of independent variable for ith
observation
yi = value of dependent variable for ith
_ observation
x = mean value for independent variable
_
y = mean value for dependent variable
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
14
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Least Squares Method

 y-Intercept for the Estimated Regression Equation

b0  y  b1 x

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
15
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression

 Example: Reed Auto Sales

Reed Auto periodically has a special week-long sale.
As part of the advertising campaign Reed runs one or
more television commercials during the weekend
preceding the sale. Data from a sample of 5 previous
sales are shown on the next slide.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
16
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Simple Linear Regression

 Example: Reed Auto Sales

Number of Number of
TV Ads (x) Cars Sold (y)
1 14
3 24
2 18
1 17
3 27
Sx = 10 Sy = 100
x2 y  20

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
17
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Estimated Regression Equation

 Slope for the Estimated Regression Equation

b1   ( xi  x )( yi  y ) 20
 5
 ( xi  x ) 2
4
 y-Intercept for the Estimated Regression Equation
b0  y  b1 x  20  5(2)  10
 Estimated Regression Equation
yˆ  10  5x

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied
Slide
18
or duplicated, or posted to a publicly accessible website, in whole or in part.