ECON3014 (Fall 2011)

30. 9 & 6.10. 2011 (Tutorial 3)

Chapter 3 Quantitative Demand Analysis

Regression Analysis

(1) Coefficient estimates

 The true relation between X and Y:
 The least square regression line:
 : parameter estimates by Least Squares regression

 Least squares regression: the line that minimizes the sum of squared deviations between
the line and the actual data. That is,

(2) Statistical significance of estimated coefficients (t-test)

 t- statistics: and
 The larger the t,  is small relatively, more confident that true parameter >0

 Hypothesis testing for the significance of the coefficient: and

 Reject H0 if t > 2.5 or if p-value 0.05 at 5% significant level
 The coefficient is statistically significant if H0 is rejected

 (95%) Confidence interval: and

 95% confidence that the true values of a and b lies within the CI

(3) Evaluating the overall fit of the regression line (Goodness of fit)


[n = no. of observations, k = no. of estimated coefficient, (n – k) = degree of freedom]

 Hypothesis testing for the goodness of fit:

 F- statistics:
 Reject H0 if F > 3 or 4 or if p-value 0.05 at 5% significant level
 The regression is significant (the model is to a certain extent useful)

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Example: Chapter 3 Question 7 (Baye)
A quant jock from your firm used a linear demand specification to estimate the demand for its
product and sent you a hard copy of the results. Unfortunately, some entries are missing. Use
the information presented in the summary output to find the missing values. Then, answer the
accompanying questions.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.62
R Square (1)
Adjusted R Square (2)
Standard Error 190.90
Observations 100.00

Analysis of Variance
Df SS MS F Significance F
Regression 2.00 (3) 1111508.88 30.50 0.00
Residual 97.00 3535019.49 36443.50
Total (4) 5758037.26

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

Intercept 187.15 (5) 0.35 0.73 –880.56 1254.86
Price of X –4.32 0.69 (6) 0.00 –5.69 –2.96
Income (7) 0.02 4.47 0.00 0.05 0.14

(1)

(2)

(3)

(4) Total df = 97 + 2 = 99

(5)

(6)

(7)

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(a) Based on these estimates, write an equation that summarizes the demand for the firm’s
product.
Qxd  187.15  4.32Px  .09M

(b) Which regression coefficients are statistically significant at the 5 percent level?
The coefficients for the Price of X and Income are statistically significant at the 5
percent level or better.

(c) Comment on how well the regression line fits the data.
The R-square is fairly low, indicating that the model explains only 39 percent of the total
variation in demand for X.
The adjusted R-square is only marginally lower (37 percent), suggesting that the
R-square is not the result of an excessive number of estimated coefficients relative to
the sample size.
The F-statistic, however, suggests that the overall regression is statistically
significant at better than the 5 percent level.