1.

Introduction to Regression Analysis

In order to introduce regression analysis, suppose that a manager wants to
determine the relationship between the firms advertising expenditures and its sales
revenue. The manager wants to test the hypothesis that higher advertising expenditures
lead to higher sales for the firm, and, furthermore, she wants to estimate the strength of
the relationship (i.e., how much sales increase for each dollar increase in advertising
expenditures). To this end, the manager collects data on advertising expenditures and
on sales revenue for the firm over the past 10 years. In this case, the level of advertising
expenditures (X) is the independent or explanatory variable, while sales revenues (Y) is
the dependent variable that the manager seeks to explain.
If we now plot each pair of advertising-sales values as a point on a graph, with
advertising expenditures (the independent or explanatory variable) measured along the
horizontal axis and sales revenues (the dependent variable) measure along the vertical
axis, we get the points (dots). This is known as scatter diagram since it shows the
spread of the points in the X-Y plane.Usually, the firm has been operating for 30 years
and over the past 10 years ago there were positive results for every year. As to imagine,
there is a positive relationship between the level of the firms advertising expenditures
and its sales revenues (i.e., higher advertising expenditures are associated with higher
sales revenues) and that this relationship is approximately linear.
One way to estimate the approximate linear relationship between the firms
advertising expenditures and its sales revenues is to draw in, by visual inspection, the
positively sloped straight line that best fits between the data points (so that the data
points are about equally distant on either side of the line). The slope of the line will then
provide an estimate of the increase in its advertising expenditures. This will give us a
rough estimate of the linear relationship between the firms sales revenues (Y) and its
advertising expenditures (X) in the form of equation:
Y = a + bX
In equation above, a is the vertical intercept of the estimated linear relationship
and gives the value of Y when X = 0, while b is the slope of the line and gives an
estimate of the increase in Y resulting from each unit increase in X. Assuming that the
manager could use the information to estimate how much the sales revenues of the firm

would be if its advertising expenditures were anywhere for example $9 million and $5
million per year, or if the advertising expenditures increased, say, to $16 million per year,
or fell to $8 million per year.
However, to test the varies of factors determined to dependent variable, we also
can use the multiple regression analysis. When the dependent variable that we seek to
explain is hypothesized to depend on more than one independent or explanatory
variable, we have multiple regression analysis. For example the firms sales revenue
may be postulated to depend not only on the firms advertising expenditures but also on
its expenditures on quality control. The regression model can then be written as:
Y = a + b1X1 + b2X2 + b3X3

2.0

Question for Group 1.

Phoenix Lumber Company uses the number of construction permits issued to help
estimate demand (sales). The firm collected the following data on annual sales and
number of construction permits issued in its market area:
Year

No. of Construction Permits Issued (000)

Sales(1,000,000)

2001

6.50

10.30

2002

6.20

10.10

2003

6.60

10.50

2004

7.30

10.80

2005

7.80

11.20

2006

8.20

11.40

2007

8.30

11.30

From the table above, below is the result/regression analysis from E.View
software:
Dependent Variable: SALES
Method: Least Squares
Date: 11/10/14 Time: 13:45
Sample: 2001 2007
Included observations: 7
Variable

Coefficient

Std. Error

t-Statistic

Prob.

CPI
C

596.2289
6464564.

41.52197
303711.1

14.35936
21.28524

0.0000
0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.976325
0.971590
87040.64
3.79E+10
-88.37383
206.1912
0.000030

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

10800000
516397.8
25.82109
25.80564
25.63008
2.049787

2.1

Answers:
a)

Which Variable is the dependent variable and which is the independent

variable ?

b)

Determine the estimated regression line.

c)

The independent variable that significant at the level of 0.05 is

number of construction permit issued since the result of probability
value is 0.0000 which is less than 0.05. Thus, number of construction
permit issued is significant in explaining the sales.

Give an economic interpretation to the value obtained for the coefficient of

determination.

e)

Sales = 6464564 + 596.23 CPI

Test the hypothesis (at the 0.05 significance level) that there is no
relationship between the variables.

d)

Dependent variable: Sales

Independent variable: Number of construction permit issued

The increase in number of construction permit issued by 1000 will

increase the number of sales by RM 596.23.

What does the F test (at the .05 significance level) of the overall
significance of the results indicate?
Fk,m,n-m-1
F 0.05,1,7-1-1
F .05,1,5 = 6.61

f)
for

Because F = 206.19, we reject the null hypotheses and conclude that

the independent variable is useful in explaining sales with (10.000030) = 99.9 percent confidence.

Suppose that 8,000 construction permits would be issued in 2008. What

would be the point estimate of Phoenix Lumber Companys sales
2008?
Sales = 6464564 + 596.23 CPI
Sales = 6464564 + 596.23 (8000)
Sales = RM11,234,404.00

3.0

Conclusion
To conclude, there is a positive relationship between the number of construction
permits issued and the sales revenue earned by the Phoenix Lumber Company. This
number of construction permits issued (independent variable or explanatory variable)
while sales (dependent variable) have strong relationship as we can see through the
probability which is below than 0.05 indicates the results from the above table is 0.0000.
Other than that, the pattern number of construction permits from year to year is
increase and it is also indicates that the number of sales revenue also increase. As we
can from the table given also, the decrease number of construction permits on 2002 will
decrease the number of sales. However, it was happened in the year of 2007 which the
increase number of construction permits there were downfall of sales revenue so this
would be explained by other factors why this sales decrease.
All in all, as mentioned from the analysis result it shows that the number of
construction permits ensure the increase of sales and it is say that have strong
relationship between of the variables.