Abha Marathe
Assistant Prof.
ENTC,VIT
Modelling-Developing a linear model
Estimation-Using software to estimate the
model
Inference-Interpreting the estimated
regression model.
Prediction-Making predictions about the
variable of interest.
A toy company sales manager needs to make some
predictions about number of unit the company would
be able to sell in coming half year. Based on the
experience the manager figures out that the monthly
units sales depend on three variable-
1. Price at which toy is sold( in dollars)
2. Monthly amount the company spends on
advertising (in 1000 dollars)
3. Monthly amount the company spends on
promotions. (in 1000 dollars)
Toy_sales_csv.csv
Manager decides to collect the data of last two years.
To estimate the regression model data of every variable is
needed(sales, price,advt,promotions)
Estimated sale is
Sales= -25096.83 – 5055.27Price + 648.61Advt + 1802.61Promo
Sales= β0 + β1Price + β2Advt + β3Promo
Sales= -25096.83 – 5055.27Price + 648.61Advt + 1802.61Promo
In general the regression model is
Y= β0 + β1X1 + β2X2 + β3X3+……..+βk Xk.
K independent parameters and K+1 beta parameters
When the X1 variable increases by one unit , Y variable increases by β1 units with
all other variable in the model kept constant.
Let all variables are kept constant, and only effect of ADVT is checked.
Y=648.61ADVT
Thus let ADVT is kept at 1, then Y=648.61. Similarly, ADVT is made as 2 then Y=
648.61*2.Thus Y changes by 648.61 times when ADVT is changed by one unit.
Note- If price increases by 1 $ then unit sales decreases by 5055 units and when
advt expenses increases by 1000 $(unit of Y) then unit sales increases by 648 units.
Technical interpretation of β0 is the value of Y when all
explanatory variables are Zero.
This technical interpretation may or may not have
managerially relevant interpretation.
It means that when all variables are zero, the value of Unit
sales is -25096.83. Thus when interpreting β0, it should be
checked whether does it make managerial sense talking
about the situation where all variables are zero.
For the coming six months company management
considers following three scenarios for selling the toy:
1. Price=9.10$, AdvtExp=52,000$,PromoExp=61,000$.
2. Price=7.10$, AdvtExp=48,000$,PromoExp=57,000$.
3. Price=8.10$, AdvtExp=50,000$,PromoExp=60,000$.
Management asks the manager out of the three
scenarios which scenario to implement to maximize
the unit sales?
