ECON1203

Business and Economics Statistics

Tutorial Problems
Week 12
1. Use a calculator to compute the sample least squares regression line for the model 𝑦 =
𝛽0 + 𝛽1 𝑥 + 𝜀, given the following six observations:
y 2 8 6 12 9 11
x 1 4 3 10 10 8

2. Suppose the relationship between the dependent variable weekly household

consumption expenditure in dollars (y) and the independent variable weekly household
income in dollars (x) is represented by the simple regression model (i refers to the ith
observation or household):
𝑦𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 + 𝜀𝑖
Suppose a sample of observations yields least squares estimates of b0 = -32 and b1 =
0.82 for this model.

(a) What does 𝜀𝑖 represent in the model?

(b) State the basic (classical) assumptions made about the ‘s in this model. Explain
in words what the assumptions mean.
(c) Does the estimate of b0 = -32 make sense? If not, does this necessarily invalidate
the model? Explain your answer.
(d) Interpret both 1 and b1. What does the model predict would be the change in y
following a $10 increase in x from some initial level?
(e) Suppose we measured y and x in cents rather than dollars. What effect would this
have on the estimated coefficient of x? What effect would it have on the
estimated intercept?
(f) Suppose y were measured in dollars but x were measured in cents. What effects
would this have on the estimated coefficient of x?
(g) Distinguish between 𝜀𝑖 and 𝜀̂𝑖 (the residual associated with observation i).
Illustrate your answer with a diagram.
3. Work through problem 16 on page 529-530 of Sharpe (Chapter 15).
4. Recall the Anzac Garage data (AnzacG.xls) used previously and available in the “Excel data”
subfolder on the Moodle site under ‘Tutorial Questions and Information’. We previously
considered the simple linear regression model given by:

𝑝𝑟𝑖𝑐𝑒𝑖 = 𝛽0 + 𝛽1 𝑎𝑔𝑒𝑖 + 𝑢𝑖

where price = the price of a used car, in dollars, and age = the age of the car, in years. The Excel
results obtained using ordinary least squares to estimate this model are presented below:

Regression Statistics

R2 0.077

Standard Error 42069

Observations 117

Coefficients Standard Error t Stat p-value

Intercept 47469 6748 7.035 0.000

Age -2658 856 -3.106 0.002

(a) Interpret the “t-Stat” and the “p-values” in the output above. What do you need to
assume for these interpretations to be correct?

(b) Calculate a 95% confidence interval for the coefficient on age.

(c) Interpret the R2 value.

(d) Test whether the estimated coefficient on Age is significantly less than zero at the 5%
level of significance.
(e) Estimate a 95% confidence interval for the mean price for a second-hand passenger car
that is 10 years old, and interpret the result. Note: the sample mean of age is 6.44 years.

Anzac Garage is worried about its pricing scheme, which is based solely on the age of the car.
When its second-hand car prices are compared with the prices of cars of the same age at other
dealerships, they are often different. A consultant notes that the value of a second-hand car
should depend on both the odometer reading and the age of the vehicle. This consultant
wanted to estimate the following two simple linear regression models separately:

𝑝𝑟𝑖𝑐𝑒𝑖 = 𝛽0 + 𝛽1 𝑎𝑔𝑒𝑖 + 𝑢𝑖

𝑝𝑟𝑖𝑐𝑒𝑖 = 𝛼0 + 𝛼1 𝑜𝑑𝑜𝑚𝑒𝑡𝑒𝑟𝑖 + 𝑣𝑖

where odometer = distance the car has travelled since leaving the factory, in kilometres. A
senior consultant advised the use of a multiple linear regression model instead, i.e.,:

𝑝𝑟𝑖𝑐𝑒𝑖 = 𝛾0 + 𝛾1 𝑜𝑑𝑜𝑚𝑒𝑡𝑒𝑟𝑖 + 𝛾2 𝑎𝑔𝑒𝑖 + 𝑣𝑖

(f) Discuss why the simple linear regression methods may not be preferable to the multiple
regression method, in general, and in the context of this problem. The resultant OLS
estimates for the multiple regression model are given below:

SUMMARY OUTPUT

Regression Statistics

R Square 0.150

Standard Error 40568

Observations 117

Coefficients Standard Error t Stat P-value

Intercept 53867 6825 7.893 0.000

Odometer (km) -0.270 0.087 -3.110 0.002

Age -360 1108 -0.325 0.746