Simple Linear Regression
Simple Linear Regression Model
Ordinary Least Square (OLS) Method
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Simple Linear Regression
Managerial decisions often are based on the
relationship between two or more variables.
Regression analysis can be used to develop an
equation showing how the variables are related.
The variable being predicted is called the dependent
variable and is denoted by y.
The variables being used to predict the value of the
dependent variable are called the independent
variables and are denoted by x.
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Simple Linear Regression
Simple linear regression involves one independent
variable and one dependent variable.
The relationship between the two variables is
approximated by a straight line.
Regression analysis involving two or more
independent variables is called multiple regression.
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Types of Relationships
(continued)
Strong relationships Weak relationships
Y Y
X X
Y Y
X Reserved. May not be scanned, copied
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X
or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Relationships
(continued)
No relationship
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Simple Linear Regression Model
The equation that describes how y is related to x and
an error term is called the regression model.
The simple linear regression model is:
y = b0 + b1x +e
where:
b0 and b1 are called parameters of the model,
e is a random variable called the error term.
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Simple Linear Regression Equation
The simple linear regression equation is:
E(y) = 0 + 1x
• Graph of the regression equation is a straight line.
• b0 is the y intercept of the regression line.
• b1 is the slope of the regression line.
• E(y) is the expected value of y for a given x value.
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Simple Linear Regression Equation
Positive Linear Relationship
E(y)
Regression line
Intercept Slope b1
b0
is positive
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Simple Linear Regression Equation
Negative Linear Relationship
E(y)
Intercept
b0 Regression line
Slope b1
is negative
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Simple Linear Regression Equation
No Relationship
E(y)
Intercept Regression line
b0
Slope b1
is 0
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Estimated Simple Linear Regression Equation
The estimated simple linear regression equation
ŷ b0 b1 x
• The graph is called the estimated regression line.
• b0 is the y intercept of the line.
• b1 is the slope of the line.
• ŷ is the estimated value of y for a given x value.
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Estimation Process
Regression Model Sample Data:
y = b0 + b1x +e x y
Regression Equation x1 y1
E(y) = b0 + b1x . .
Unknown Parameters . .
b0, b1 xn y n
Estimated
b0 and b1 Regression Equation
provide estimates of ŷ b0 b1 x
b0 and b1 Sample Statistics
b0, b1
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Least Squares Method
Least Squares Criterion
min (y i y i ) 2
where:
yi = observed value of the dependent variable
for the ith observation
y^i = estimated value of the dependent variable
for the ith observation
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Least Squares Method
Slope for the Estimated Regression Equation
b1 ( x x )( y y )
i i
(x x ) i
2
where:
xi = value of independent variable for ith
observation
yi = value of dependent variable for ith
_ observation
x = mean value for independent variable
_
y = mean value for dependent variable
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Least Squares Method
y-Intercept for the Estimated Regression Equation
b0 y b1 x
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Simple Linear Regression
Example: Reed Auto Sales
Reed Auto periodically has a special week-long sale.
As part of the advertising campaign Reed runs one or
more television commercials during the weekend
preceding the sale. Data from a sample of 5 previous
sales are shown on the next slide.
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Simple Linear Regression
Example: Reed Auto Sales
Number of Number of
TV Ads (x) Cars Sold (y)
1 14
3 24
2 18
1 17
3 27
Sx = 10 Sy = 100
x2 y 20
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Estimated Regression Equation
Slope for the Estimated Regression Equation
b1 ( xi x )( yi y ) 20
5
( xi x ) 2
4
y-Intercept for the Estimated Regression Equation
b0 y b1 x 20 5(2) 10
Estimated Regression Equation
yˆ 10 5x
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