Practical Exercises

Multiple Regression Model

PGDBA 2014-2015

1) To explain what determines the price of air conditioners, one

researcher obtained the following regression results based on
a sample of 19 air conditioners.

Y i 68.236 0.023 X 2 i + 19.729X3i + 7.653 X4i

se =

(.005)

(8.992)

(3.082)

R2 = 0.84
Where,
Y= the price, in dollars
X2= the energy rating of AC
X3= the energy efficiency ratio
X4= the number of settings
se= standard errors
a) Interpret the regression results
R2 = 0.84, this means that 84% of the relation is explain by the
model.
Se for X2 = 0.05, therefore, T value of X2= (0.023-0)/0.005 = 4.6
Se for X3 = 8.992, therefore, T value of X3 = (19.729-0)/8.992 =
2.19
Se for X4 = 3.082, therefore, T value of X4 = (7.653-0)/3.082 =
2.48
From the T values above, we can say that we are above 95%
confident that variables Energy Ratings of AC (X2), Energy
Efficiency Ratio (X3) and Number of Settings (X4) influence
(positively) the Price (Y).
b) Do the results make economic sense?
From the above equation denotes that for every unit rise in
Energy Rating AC, there is an increase of .023 units in Price (if
energy efficiency ratio and numbers of settings are constant).
For every unit raise in Energy Efficiency Ratio, there is a 19.729
units raise in Price (if Energy Rating AC and Number of Settings
are constant).

For every unit raise in Number of Settings, there is a 7.653 units

raise in Price (if Energy Rating AC and Energy Efficiency Ratio are
constant.
Therefore we can say that rise in X2, X3 and X4 will lead to rise in
Price (Y)

c) At =5%, test the hypothesis (using t test) that the energy

rating has no effect on the price of an AC vs. that it has a positive
effect.
H0: Coefficient of X2 = 0
If Coefficient of X2 = 0,
Then from the above equation,
Se for X2 = 0.05, therefore, T value of X2= (0.023-0)/0.005 =
4.6
This shows that we are ~99.99% confident that the coefficient is
no equal to 0
Therefore, we reject H0.
d) Would you accept the null hypothesis that the 3 explanatory
variables together do not explain a substantial variation in the
prices of AC? Show clearly all your calculations. [Hint: Use F test]
H0: All 3 variables (X2, X3, and X4) do not explain the Y variable
F = (R2/(doff.))/((1-R2)/(doff.)) = = (R2/(k-1))/((1-R2)/(n-k))
Given
n=19
k= 4
F = (0.84/2) / ((1-8.4)/15) = 0.000003225
This means it is ~99.9999% significant.
Therefore, we reject H0, which means that X 2, X3 and X4 explain
the variable Y.

2. U.S. defense budget outlays, 1962-1981. In order to explain

the US defense budget, you are asked to consider the
following model:
Yt B1 B2 X 2t B3 X 3t B4 X 4t u t

Where Yt
X 2t
X 3t
X 4t

= defense budget-outlay for year t, $ billions

= GNP for year t, $ billion
= US military sales/assistance in year t, $ billions
= aerospace industry sales, $ billions

To test this model, you are given the data in the following Table.
Year

Defense
budget
outlays,
Y

GNP,
X2

US military
sales/assist
ance, X3

Conflic
ts
100,00
0+, X5

0.6
0.9
1.1
1.4
1.6
1.0
0.8
1.5
1.0
1.5

Aerosp
ace
industr
y sales,
X4
16.0
16.4
16.7
17.0
20.2
23.4
25.6
24.6
24.8
21.7

1962
1963
1964
1965
1966
1967
1968
1969
1970
1971

51.1
52.3
53.6
49.6
56.8
70.1
80.5
81.2
80.3
77.7

1972

78.3

1973

74.5

1974

77.8

1975

85.6

1976

89.4

1977

97.5

560.3
590.5
632.4
684.9
749.9
793.9
865.0
931.4
992.7
1077.
6
1185.
9
1326.
4
1434.
2
1549.
2
1718.
0
1918.

2.95

21.5

4.8

24.3

10.3

26.8

16.0

29.5

14.7

30.4

8.3

33.3

0
0
0
1
1
1
1
1
1
1

1978

105.2

1979

117.7

1980

135.9

1981

162.1

3
2163.
9
2417.
8
2633.
1
2937.
7

11.0

38.0

13.0

46.2

15.3

57.6

18.0

68.9

a. Estimate the parameters of this model and their standard errors

and obtain R 2 , and R 2 .

Using Multiple Regression Analysis,

R2 = 0.9710
2
R = 0.9656
SE for GNP, X2 = 0.0070
SE for US Military Sales/assistance, X3 = 0.4539
SE for Aerospace Industry Sales, X4 = 0.2776
The Model is,
Y = 22.7751 + 0.01670 X2 - 0.6961 X3 + 1.4677 X4
b. Comment on the results, taking into account any prior
expectations you have about the relationship between Y and the
various X variables.

H0: X2, X3, X4 does not have any impact on Y

P Value for GNP, X2 = 0.03007
P Value for US Military Sales/assistance, X3 = 0.1446
P Value for Aerospace Industry Sales, X4 = 0.000073
From the above result we are above 95% confident that the
variables GNP (X2), Aerospace Industry Sales (X 4) are significant
and impact the value Defense Budget Outlays (Y) (also t-stat is
greater than 2).
However, since we are less than 95% confident that the variable
US Military Sales/assistance (X 3) is significant (also t-stat value is
less than 2), therefor it we are not confident that it will have an
impact on Y.
Reject H0, since X2 and X4 impact the value of Y.
c. What other variable(s) might you want to include in the model
and why?
3. The demand for cable. The table gives data used by a
telephone cable manufacturer to predict sales to a major
customer for the period 1968-1983.
The variables in the table are defined as follows:
Y = annual sales in MPF, million paired feet
X2 = gross national product (GNP), $, billions
X3 = housing starts, thousand of units
X4 = unemployment rate, %
X5 = prime rate lagged 6 months
X6 = customer line gains, %
Year X2,
GNP

X3,
housin
g
starts

1968
1969
1970
1971
1972
1973
1974

1503.6
1486.7
1434.8
2035.6
2360.8
2043.9
1331.9

1051.8
1078.8
1075.3
1107.5
1171.1
1235.0
1217.8

X4,
X5,
unemploym prime
ent, %
rate
lag, 6
mos.
3.6
5.8
3.5
6.7
5.0
8.4
6.0
6.2
5.6
5.4
4.9
5.9
5.6
9.4

X6,
custom
er line
gains,
%
5.9
4.5
4.2
4.2
4.9
5.0
4.1

Y, total
plastic
purcha
ses
(MPF)
5873
7852
8189
7497
8534
8688
7270

1975
1976
1977
1978
1979
1980
1981
1982
1983

1202.3
1271.0
1332.7
1399.2
1431.6
1480.7
1510.3
1492.2
1535.4

1160.0
1535.0
1961.8
2009.3
1721.9
1298.0
1100.0
1039.0
1200.0

8.5
7.7
7.0
6.0
6.0
7.2
7.6
9.2
8.8

9.4
7.2
6.6
7.6
10.6
14.9
16.6
17.5
16.0

3.4
4.2
4.5
3.9
4.4
3.9
3.1
0.6
1.5

5020
6035
7425
9400
9350
6540
7675
7419
7923

You are to consider the following model:

Yi 1 2 X 2t 3X 3t 4 X 4t 5 X 5t 6 X 6t t
a.

Estimate the preceding regression

Using Multiple Regression Analysis we got the following output.

From the table we got the following output,

R2 = 0.8227 (i.e. 82.27% of the relation is explained by this model)
2
R = 0.7341
SE for X2 = 2.5125
SE for X3 = 0.8435
SE for X4 = 187.7072
SE for X5 = 147.0496

SE for X6 = 292.1447
B1 = 5962.6555
B2 = 4.8836
B3 = 2.3639
B4 = -819.1287
B5 = 12.0104
B6 = -851.3926
F value = 0.0016 (~99.99% significant)
T stat value of X2 = 1.9437 (less than 95% confident that the
variable impacts output)
T stat value of X3 = 2.8023 (more than 95% confident that the
variable impacts output)
T stat value of X4 = -4.3638 (more than 95% confident that the
variable impacts output)
T stat value of X5 = 0.0816 (less than 95% confident that the
variable impacts output)
T stat value of X6 = -2.9142 (more than 95% confident that the
variable impacts output)

The Model
Yi = 5962.6555 + 4.8836X2 + 2.3639X3 - 819.1287X4 + 12.0104X5 851.3926X6
b. What are the expected signs of the coefficients of this model?
According to the original model provided, it was expected that all
the coefficients should be positive.
c. Are the empirical results in accordance with prior expectations?
However, after using Multiple Regression Analysis, we find out that
The Model
Yi = 5962.6555 + 4.8836X2 + 2.3639X3 - 819.1287X4 + 12.0104X5 851.3926X6
Coefficients
B1 = 5962.6555
B2 = 4.8836

B3
B4
B5
B6

=
=
=
=

2.3639
-819.1287
12.0104
-851.3926

This means that X4 and X6 have negative impact on the output.

d. Are the estimated partial regression coefficients individually
statistically significant at the 5 percent level of significance?
From the output, at 5 percent level of significance, we find out that
the X2 and X5 for not statistically significant
T stat value of X2 = 1.9437 (less than 95% confident that the
variable impacts output)
T stat value of X3 = 2.8023 (more than 95% confident that the
variable impacts output)
T stat value of X4 = -4.3638 (more than 95% confident that the
variable impacts output)
T stat value of X5 = 0.0816 (less than 95% confident that the
variable impacts output)
T stat value of X6 = -2.9142 (more than 95% confident that the
variable impacts output)
e. Suppose you first regress Y on X2, X3 and X4 only then decide to
add the variables X5 and X6. How would you find out if it is worth
adding the variables X5 and X6? Which test do you use? Show the
necessary calculations.
Using Multiple regression by regressing Y on X2,X3 and X4, we get
the following output.

R2 = 0.6012 (i.e. 60.12% of the relation is explained by this model)

2
R = 0.5015
F value = 0.0095
By adding the variable X5 and X6, we get the following output.

R2 = 0.8227 (i.e. 82.27% of the relation is explained by this model)

2
R = 0.7341
F value = 0.0016

This shows that the model is better represented by adding X5 and X6

as it has higher value of R2 (better explained) and high value of F
(more significant).

4) The following data set provides information about

performance of public sector in India.
Run a multiple
regression of output on other variables and interpret the
results.
Outpu Capit Raw
Year
t
al
Material
Labor
443.3 461.1
121472
1985
4
7
373.04
2
379.0
160712
1986
5 536.1
259.88
8
413.5 509.8
154538
1987
2
8
322.81
9
166492
1988 466.2 677.5
380.49
6
473.0 610.7
159368
1989
5
2
381.38
0
598.7
160901
1990 544.1
1
424.61
5
508.7 601.0
162680
1991
1
6
381.93
6
1992 468.3 585.6
347 154341

6
1993

451.3

1994

1999

413.1
391.1
5
445.0
7
406.7
5
388.3
1
266.6
9

2000

307.4

1995
1996
1997
1998

2
429.6
2
527.8
7
468.9
5
451.3
4
446.3
446.5
1
509.3
9
488.3
3

313.53
260.36
244.06
296.75
283.87
239.24
127.87
153.8

1
156815
3
156594
4
153002
9
147701
0
146893
8
146761
1
143450
3
137198
8

Output = Nominal Output deflated by WPI (base 1981-82 = 100)

Measured in Rupee crore
Capital = Capital employed deflated by WPI (base 1981-82 = 100),
Measured in Rupee crore
Raw material = Raw material used is deflated by WPI (base 1981-82 =
100), Measured in Rupee crore
Labor = Number of Labor employed
Using Multiple Regression Analysis we get the following output.

Model
Output = 73.6 0.16 Capital + 0.80 Raw Material + 0.0001 Labor

From the model we can find that,

For every unit rise in Capital, there is -0.16 units decrease in Output.
For every unit rise in Material, there is 0.80 units increase in Output.
For every unit rise in Capital, there is 0.0001 units increase in Output.
R2 = 0.9431 (94.31% if the relation is explained by this model)
Adjusted R2 = 0.9289
SE for Capital = 0.0908
SE for Raw material = 0.0672
SE for Labor = 0.00005
F value = ~99.99%, which means the variance is significant within the
model.
T-stat value of Capital = -1.7640 (less than 95% confident that the
variable impacts output)
T-stat value of Material = 12.0058 (more than 95% confident that the
variable impacts output)
T-stat value of labor = 12.0058 (more than 95% confident that the
variable impacts output)
There for Capital is not statistically significant to impact the output.