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Objectives of regression analysis

Development of Mathematical Use of the Equation for the

Equation for modeling the purpose of prediction.
relationship of the variables.

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Outlines

Definition of Regression with Examples

Define Independent and Dependent variables

Types of Regression with definition (Simple & multiple)

Fit/ Estimate Simple linear regression Line/model

Estimation of regression coefficients with interpretation

Calculation of standard error of the estimates

Interpret Coefficient of determination

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Regression with Examples

Regression analysis: It is concerned with the study of forming a mathematical equation of the
dependence of one variable (the dependent variable) on one or more other variables (the
independent variables).

Examples:
• The marketing director of a company may want to know how the demand for the company’s
product is related, to say advertising expenditure.
• Suppose the sales manager of a company say X, wants to determine how the number of credit
cards sell is related to the number of call.

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Dependent and Independent variables with Example

Dependent variable: The dependent variable is the variable being predicted or estimated. It is
denoted by y.

Independent variable: The Independent Variable provides the basis for estimation. It is the
predictor variable. It is denoted by x. It is also called as Explanatory variable.

Example:
• If we want to know the expected weekly production of a company then
production will be the dependent variable and the predictor/independent
variables could be the capital, number of labours engaged, supply of raw
materials etc.

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Types of Regression Model

Based on number of variables Regression model is of 2 types:

1. Simple Regression model
2. Multiple Regression model

Based on nature of dependent variables Regression model

is of several types:
1. Linear Regression Model
2. Logistic Regression Model and so on.

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Simple Linear Regression Model with Example

Simple Linear Regression Model :

Regression model that consists of one
dependent variable and one independent
variable is called simple regression model.

Suppose here,
X= Income and
Y= Expenditure

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 Multiple Linear Regression Model with Example

Multiple Linear Regression Model :

Multiple Linear Regression Model :
Regression model that consists of one 𝒀 𝒊=𝒂+ 𝒃𝟏 𝑿 𝒊 + 𝒃𝟐 𝒁 𝒊 +𝜺 𝒊
dependent variable and more than one
independent variables is called multiple
regression model. Suppose here,
X= Income
Z= Family Size and
Y= Expenditure

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 Estimate Simple linear regression Model

Let, Estimated Simple linear regression

Model,

Formula of getting the value of regression coefficients:

Slope

Intercept

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Example of Estimation of regression coefficients with interpretation

Problem: Suppose a company’s owner wants to forecast sales on the basis of advertising expenses. The owner
would like to review the relationship between sales and the amount spent on advertising. Below is the
information on sales and advertising expense for the last four months:
𝑛

Advertising expense(x) Sales revenue(y) ∑ ( 𝑥𝑖− 𝑥) ( 𝑦𝑖 − 𝑦 )

𝑖 =1
𝑏=
Month ($ million) ($ million) 𝑛

∑ ( 𝑥𝑖 − 𝑥 ) 2
July 2 7 𝑖 =1

August 1 3
September 3 8
October 4 10 𝑎= 𝑦 −𝑏 𝑥

a) Draw scatter plot.

b) Determine the estimated regression model.
c) Interpret the value and .
d) Estimate sales when $9 million is spent on advertising.

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Example of Estimation of regression coefficients with interpretation

Solution:
a) If we plot the data and draw scatter plot we get as below plot

Sales Revenue(Y)
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10 10

8 8

Sales Revenue(Y)
Series1; 7
6 Sales Revenue(Y)

4
3
2

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5

Advertising Expense(X)

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Example of Estimation of regression coefficients with interpretation

Solution:
b) Let, Estimated Simple linear regression Model,

we know that,
4

x i
10
x i 1
 2.5 and
n 4
4

y i
28
y i 1
 7
n 4

∑ ( 𝑥𝑖−
𝑎= 𝑦 −𝑏 𝑥
𝑥) ( 𝑦𝑖 − 𝑦 )
𝑖 =1
𝑏= 𝑛

∑ ( 𝑥𝑖 − 𝑥 ) 2

𝑖 =1

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Example of Estimation of regression coefficients with interpretation

  x  x  y  y 
i i =
bˆ1  i 1 n

 x  x 
2
i
i 1

ˆa0  y  ˆ1 x
=7-2.2*2.5 =1.5

Now if we put the values the Estimated Simple linear regression Model,
,

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Example of Estimation of regression coefficients with interpretation

c) Interpretation:
Sales Revenue(Y)
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a=2.2 means that an increase of $1million in
advertising cost, the sales revenue will increase $2.2 10 f(x) = 2.2 x + 1.5
R² = 0.930769230769231
million.
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Sales Revenue(Y)
Sales Revenue(Y)
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Linear (Sales Revenue(Y))

b=1.5 means that, if there is no advertisement cost,

then sales revenue would be $1.5 million. 2

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5

Advertising Expense(X)

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Prediction of Dependent variable in terms of independent variable and calculation of error

d) Now if x= 9, then

=1.5+2.2*9=21.3.So, when advertisement cost is $9 million, the

expected sales revenue would be $21.3 million.

Calculation of error for a single value:

In the given data set , when X= 3, Y=8. But using the Estimated regression equation
the value is,
=1.5+2.2*3=8.1.
So the amount of error is, =8-8.1=-0.1.

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 Coefficient of Determination()

Coefficient of Determination ( r 2 ): The coefficient of determination tells the percent of

the variation in the dependent variable that is explained (determined) by the model and
the explanatory variable.

Interpretation of r 2 : Suppose r 2 =92.7%.

Interpretation: Almost 93% of the variability of the dependent variables explained by
the independent variables

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17 ©Maksuda Akter Rubi