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Regression Models
To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna © 2008 Prentice-Hall, Inc.
Power Point slides created by Jeff Heyl © 2009 Prentice-Hall, Inc.
Learning Objectives
After completing this chapter, students will be able to:
4.1 Introduction
4.2 Scatter Diagrams
4.3 Simple Linear Regression
4.4 Measuring the Fit of the Regression
Model
4.5 Using Computer Software for
Regression
4.6 Assumptions of the Regression
Model
10 –
8–
Sales ($100,000)
6–
4–
2–
0– | | | | | | | |
0 1 2 3 4 5 6 7 8
Payroll ($100 million)
Figure 4.1
where
Y = dependent variable (response)
X = independent variable (predictor or explanatory)
0 = intercept (value of Y when X = 0)
1 = slope of the regression line
e = random error
Yˆ b0 b1 X
where
Y^ = dependent variable (response)
X = independent variable (predictor or explanatory)
b0 = intercept (value of Y when X = 0)
b1 = slope of the regression line
Y = Sales
X = Area payroll
The line chosen in Figure 4.1 is the one that
minimizes the errors
X
X
average (mean) of X values
n
Y
Y
average (mean) of Y values
n
b1
( X X )(Y Y )
(X X ) 2
b0 Y b1 X
© 2009 Prentice-Hall, Inc. 4 – 14
Triple A Construction
Regression calculations
Y X (X – X)2 (X – X)(Y – Y)
6 3 (3 – 4)2 = 1 (3 – 4)(6 – 7) = 1
8 4 (4 – 4)2 = 0 (4 – 4)(8 – 7) = 0
9 6 (6 – 4)2 = 4 (6 – 4)(9 – 7) = 4
5 4 (4 – 4)2 = 0 (4 – 4)(5 – 7) = 0
4.5 2 (2 – 4)2 = 4 (2 – 4)(4.5 – 7) = 5
9.5 5 (5 – 4)2 = 1 (5 – 4)(9.5 – 7) = 2.5
ΣY = 42 ΣX = 24 Σ(X – X)2 = 10 Σ(X – X)(Y – Y) = 12.5
Y = 42/6 = 7 X = 24/6 = 4
Table 4.2
X
X 24
4
6 6
Y
Y 42
7
6 6
b1
( X X )(Y Y ) 12.5
1.25
(X X ) 2
10
b0 Y b1 X 7 (1.25)(4) 2
Therefore Yˆ 2 1.25 X
© 2009 Prentice-Hall, Inc. 4 – 16
Triple A Construction
Regression calculations
X
X 24
4 sales = 2 + 1.25(payroll)
6 6
Y
Y 42
7
If the payroll next
year is $600 million
6 6
b1
ˆ
( X X )(Y YY 1..525(6) 9.5 or $ 950,000
) 2 12
1.25
(X X ) 2
10
b0 Y b1 X 7 (1.25)(4) 2
Therefore Yˆ 2 1.25 X
© 2009 Prentice-Hall, Inc. 4 – 17
Measuring the Fit
of the Regression Model
Regression models can be developed
for any variables X and Y
How do we know the model is actually
helpful in predicting Y based on X?
We could just take the average error, but
the positive and negative errors would
cancel each other out
Three measures of variability are
SST – Total variability about the mean
SSE – Variability about the regression line
SSR – Total variability that is explained by
the model
© 2009 Prentice-Hall, Inc. 4 – 18
Measuring the Fit
of the Regression Model
Sum of the squares total
SST (Y Y )2
An important relationship
SST SSR SSE
Table 4.3
SST = 22.5
Sum of the squared error SSE = 6.875
SSRˆ=215.625
SSE e (Y Y )
2
An important relationship
SST SSR SSE
^
Y–Y Y
6–
4–
2–
0– | | | | | | | |
0 1 2 3 4 5 6 7 8
Payroll ($100 million)
Figure 4.2
r r2
r 0.6944 0.8333
* *
* * *
* * * * *
* *
* *** *
*
(c) No Correlation: X (d) Perfect Negative X
r=0 Correlation:
Figure 4.3 r = –1
© 2009 Prentice-Hall, Inc. 4 – 25
Using Computer Software
for Regression
Program 4.1A
© 2009 Prentice-Hall, Inc. 4 – 26
Using Computer Software
for Regression
Program 4.1B
© 2009 Prentice-Hall, Inc. 4 – 27
Using Computer Software
for Regression
Program 4.1C
© 2009 Prentice-Hall, Inc. 4 – 28
Using Computer Software
for Regression
Program 4.1D
© 2009 Prentice-Hall, Inc. 4 – 29
Using Computer Software
for
Correlation coefficient is
Regression
called Multiple R in Excel
Program 4.1D
© 2009 Prentice-Hall, Inc. 4 – 30
Assumptions of the Regression Model
Figure 4.4A
© 2009 Prentice-Hall, Inc. 4 – 32
Residual Plots
Nonconstant error variance
Error
Figure 4.4B
© 2009 Prentice-Hall, Inc. 4 – 33
Residual Plots
Nonlinear relationship
Error
Figure 4.4C
© 2009 Prentice-Hall, Inc. 4 – 34
Estimating the Variance
n k 1
where
n = number of observations in the sample
k = number of independent variables
The F statistic is
MSR
F
MSE
This describes an F distribution with
degrees of freedom for the numerator = df1 = k
degrees of freedom for the denominator = df2 = n – k – 1
0.05
F = 7.71 9.09
Figure 4.5
© 2009 Prentice-Hall, Inc. 4 – 45
Analysis of Variance (ANOVA) Table
DF SS MS F SIGNIFICANCE
Regression k SSR MSR = SSR/k MSR/MSE P(F >
MSR/MSE)
Residual n-k-1 SSE MSE =
SSE/(n - k - 1)
Total n-1 SST
Table 4.4
© 2009 Prentice-Hall, Inc. 4 – 46
ANOVA for Triple A Construction
Program 4.1D
(partial)
Yˆ b0 b1 X 1 b2 X 2 ... bk X k
where
Ŷ = predicted value of Y
b0 = sample intercept (and is an estimate of 0)
bi = sample coefficient of the ith variable (and is
an estimate of i)
Yˆ 146631 44 X 1 2899 X 2
Program 4.2
Program 4.3
© 2009 Prentice-Hall, Inc. 4 – 58
Jenny Wilson Realty
Yˆ 121,658 56.43 X 1 3,962 X 2 33,162 X 3 47,369 X 4
F-value
indicates
significance
Low p-values
indicate each
variable is
significant
Program 4.3
© 2009 Prentice-Hall, Inc. 4 – 59
Model Building
SST /( n 1)
* * * *
*
** * * ** *
*
*** * ** *
Linear relationship Nonlinear relationship
20 –
15 –
10 –
5–
0– | | | | |
1.00 2.00 3.00 4.00 5.00
Weight (1,000 lb.)
Figure 4.6A
Program 4.4
20 –
15 –
10 –
5–
0– | | | | |
1.00 2.00 3.00 4.00 5.00
Figure 4.6B Weight (1,000 lb.)
© 2009 Prentice-Hall, Inc. 4 – 67
Colonel Motors
The nonlinear model is a quadratic model
The easiest way to work with this model is to
develop a new variable
X 2 ( weight)2
This gives us a model that can be solved with
linear regression software
Yˆ b0 b1 X 1 b2 X 2
Program 4.5