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

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Sample Data for House Price Model
House Price in $1000s Square Feet
(Y) (X)
245 1400
312 1600
279 1700
308 1875
199 1100
219 1550
405 2350
324 2450
319 1425
255 1700

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Graphical Presentation
• House price model: scatter plot
450
400
House Price ($1000s) 350
300
250
200
150
100
50
0
0 500 1000 1500 2000 2500 3000
Square Feet

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Regression Using Excel
• Tools / Data Analysis / Regression

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Excel Output
Regression Statistics
Multiple R 0.76211 The regression equation is:
R Square 0.58082
Adjusted R Square 0.52842 house price  98.24833  0.10977 (square feet)
Standard Error 41.33032
Observations 10
yˆ  98.24833  0.10977 X
ANOVA
df SS MS F Significance F

Regression 1 18934.9348 18934.9348 11.0848 0.01039

Residual 8 13665.5652 1708.1957
Total 9 32600.5000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

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Graphical Presentation
• House price model: scatter plot and regression
line
450
400

House Price ($1000s)

350
Slope
300
250
= 0.10977
200
150
100
50
Intercept 0
= 98.248 0 500 1000 1500 2000 2500 3000
Square Feet

house price  98.24833  0.10977 (square feet)

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 Interpretation of the Intercept, b 0

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)
• Here, no houses had 0 square feet, so b0 = 98.24833 has
no meaningful interpretation

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Interpretation of the Slope Coefficient, b1

house price  98.24833  0.10977 (square feet)

• b1 measures the estimated change in the

average value of Y as a result of a one-unit
change in X
• Here, b1 = .10977 tells us that the average value of a
house increases by .10977($1000) = $109.77, on average,
for each additional one square feet of size

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 Measures of Variation

• Total variation is made up of two parts:

SST  SSR  SSE

Total Sum of Regression Sum Error Sum of
Squares of Squares Squares

SST   (y i  y)2 SSR   (yˆ i  y)2 SSE   (y i  yˆ i )2

where:
y = Average value of the dependent variable
yi = Observed values of the dependent variable
ŷ = Predicted value of y for the given x value
i i SimpleLinearRegEx1-9
 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 attributable to the linear relationship
between x and y
• SSE = error sum of squares
• Variation attributable to factors other than the linear relationship
between x and y

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 Coefficient of Determination, R 2

• 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 
2

SST total sum of squares

note: 0 R 1
2
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 Examples of Approximate r2 Values

Y
r2 = 1

Perfect linear relationship

between X and Y:
X
r2 = 1
Y 100% of the variation in Y is
explained by variation in X

X
r =1
2
SimpleLinearRegEx1-12
 Examples of Approximate
r2 Values
Y
0 < r2 < 1

Weaker linear relationships

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

X
SimpleLinearRegEx1-13
 Examples of Approximate
r2 Values

r2 = 0
Y
No linear relationship
between X and Y:

The value of Y does not

X depend on X. (None of the
r2 = 0
variation in Y is explained
by variation in X)

SimpleLinearRegEx1-14
Excel Output
SSR 18934.9348
Regression Statistics
R 2
  0.58082
Multiple R 0.76211 SST 32600.5000
R Square 0.58082
Adjusted R Square 0.52842 58.08% of the variation in
Standard Error 41.33032
house prices is explained by
Observations 10
variation in square feet
ANOVA
df SS MS F Significance F
Regression 1 18934.9348 18934.9348 11.0848 0.01039
Residual 8 13665.5652 1708.1957
Total 9 32600.5000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

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 2
Correlation and R
• The coefficient of determination, R2, for a simple
regression is equal to the simple correlation
squared

2 2
R  rxy

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 Estimation of Model Error Variance

• An estimator for the variance of the population model error is

 i
e
SSE
2

σˆ  s 
2 2
e  i1
n2 n2
• Division by n – 2 instead of n – 1 is because the simple regression model uses two estimated
parameters, b0 and b1, instead of one

is called the standard error of the estimate

se  se 2

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Excel Output
Regression Statistics
Multiple R 0.76211 se  41.33032
R Square 0.58082
Adjusted R Square 0.52842
Standard Error 41.33032
Observations 10

ANOVA
df SS MS F Significance F
Regression 1 18934.9348 18934.9348 11.0848 0.01039
Residual 8 13665.5652 1708.1957
Total 9 32600.5000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

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Comparing Standard Errors
se is a measure of the variation of observed y
values from the regression line
Y Y

small se X large se X

The magnitude of se should always be judged relative to the size

of the y values in the sample data

i.e., se = $41.33K is moderately small relative to house prices in the $200 - $300K range
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 Inferences About the Regression Model

• The variance of the regression slope coefficient (b1) is estimated by

2 2
s s
s2b1  e
 e

 (x i  x) (n  1)s x
2 2

where:
sb1 = Estimate of the standard error of the least squares slope

SSE
se  = Standard error of the estimate
n2
SimpleLinearRegEx1-20
Excel Output
Regression Statistics
Multiple R 0.76211
R Square 0.58082
Adjusted R Square 0.52842
Standard Error
Observations
41.33032
10
sb1  0.03297
ANOVA
df SS MS F Significance F
Regression 1 18934.9348 18934.9348 11.0848 0.01039
Residual 8 13665.5652 1708.1957
Total 9 32600.5000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

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Inference about the Slope: t Test
• t test for a population slope
• Is there a linear relationship between X and Y?
• Null and alternative hypotheses
H0: β1 = 0 (no linear relationship)
H1: β1  0 (linear relationship does exist)
• Under H0, the test statistic
b1  1 where:
t ~ t (n  2)
sb1 b1 = regression slope
coefficient
β1 = hypothesized slope
sb1 = standard
error of the slope
SimpleLinearRegEx1-22
 Inference about the Slope: t Test
(continued)

House Price Estimated Regression Equation:

Square Feet
in $1000s
(x)
(y)
house price  98.25  0.1098 (sq.ft.)
245 1400
312 1600
279 1700
308 1875 The slope of this model is 0.1098
199 1100
219 1550
Does square footage of the house
405 2350 affect its sales price?
324 2450
319 1425
255 1700

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Inferences about the Slope: t Test Example

b1 sb1
H0: β1 = 0 From Excel output:
H1: β1  0 Coefficients Standard Error t Stat P-value
Intercept 98.24833 58.03348 1.69296 0.12892
Square Feet 0.10977 0.03297 3.32938 0.01039

b1  β1 0.10977  0
t  t  3.32938
sb1 0.03297

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Inferences about the Slope: t Test Example
(continued)
Test Statistic: t = 3.329
b1 sb1 t
H0: β1 = 0 From Excel output:
H1: β1  0 Coefficients Standard Error t Stat P-value
Intercept 98.24833 58.03348 1.69296 0.12892
d.f. = 10-2 = 8 Square Feet 0.10977 0.03297 3.32938 0.01039
t8,.025 = 2.3060
Decision:
a/2=.025 a/2=.025 Reject H0
Conclusion:
Reject H0 Do not reject H0 Reject H0
There is sufficient evidence
-tn-2,α/2 0 tn-2,α/2 that square footage affects
-2.3060 2.3060 3.329 house price SimpleLinearRegEx1-25
Inferences about the Slope: t Test Example
(continued)
P-value = 0.01039
P-value
H0: β1 = 0 From Excel output:
H1: β1  0 Coefficients Standard Error t Stat P-value
Intercept 98.24833 58.03348 1.69296 0.12892
Square Feet 0.10977 0.03297 3.32938 0.01039

This is a two-tail test, so Decision: P-value < α so

the p-value is Reject H0
P(t > 3.329)+P(t < -3.329) Conclusion:
= 0.01039 There is sufficient evidence
(for 8 d.f.) that square footage affects
house price SimpleLinearRegEx1-26
Confidence Interval Estimate for the Slope

Confidence Interval Estimate of the Slope:

b1  t n2,α/2 sb1  β1  b1  t n2,α/2sb1
d.f. = n - 2

Excel Printout for House Prices:

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 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)
SimpleLinearRegEx1-27
Confidence Interval Estimate for the
Slope
(continued)

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 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 $33.70 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

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F-Test for Significance
• F Test statistic: MSR
F
where MSE

SSR
MSR 
k
SSE
MSE 
n  k 1
where F 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)

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Excel Output
Regression Statistics
Multiple R 0.76211
MSR 18934.9348
R Square 0.58082 F   11.0848
Adjusted R Square 0.52842 MSE 1708.1957
Standard Error 41.33032
Observations 10 With 1 and 8 degrees P-value for
of freedom the F-Test
ANOVA
df SS MS F Significance F
Regression 1 18934.9348 18934.9348 11.0848 0.01039
Residual 8 13665.5652 1708.1957
Total 9 32600.5000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 98.24833 58.03348 1.69296 0.12892 -35.57720 232.07386
Square Feet 0.10977 0.03297 3.32938 0.01039 0.03374 0.18580

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F-Test for Significance
(continued)

H0: β1 = 0 Test Statistic:

H1: β1 ≠ 0 MSR
F  11.08
 = .05 MSE
df1= 1 df2 = 8 Decision:
Critical Reject H0 at  = 0.05
Value:
F = 5.32
Conclusion:
 = .05
There is sufficient evidence that
0 F house size affects selling price
Do not Reject H0
reject H0
F.05 = 5.32
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Predictions Using Regression Analysis

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
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Graphical Analysis
• The linear regression model is based on minimizing
the sum of squared errors
• If outliers exist, their potentially large squared errors
may have a strong influence on the fitted regression
line
• Be sure to examine your data graphically for outliers
and extreme points
• Decide, based on your model and logic, whether the
extreme points should remain or be removed

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Summary
• Introduced the linear regression model
• Reviewed correlation and the assumptions of linear
regression
• Discussed estimating the simple linear regression
coefficients
• Described measures of variation
• Described inference about the slope
• Addressed estimation of mean values and prediction
of individual values

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