316-206 Quantitative Methods 2

First Semester, 2008

Tutorial 5
for week of April 14 to April 18, 2008

PART A Questions to be completed BEFORE the tutorial

Question A1
The owner of a business providing hand car washes wished to estimate the relationship
between total expenses each day (labeled y and measured in $000s) and the number of
cars washed each day (x). These expenses include: wages, rent, water costs, electricity,
chemicals, materials, etcetera. A random sample of 35 days was chosen, and on each of
these days expenses y and number of cars washed x were recorded. With this sample, the
following statistics were calculated.
n
X n
X n
X n
X n
X
xi = 2, 549 yi = 31.4 xi yi = 2, 659 x2i = 233, 680 yi2 = 28.7
i=1 i=1 i=1 i=1 i=1

Using this information, complete the following.

a Find the ordinary least squares regression line, i.e. calculate βb0 and βb1 .

b Interpret the values of βb0 and βb1 that you have calculated.

c Show that your regression line passes through the mean of the sample, i.e. show that
y = βb0 + βb1 x.

Question A2
The branch manager of a bank wants to know whether a teller’s experience is related
to the quality of his or her work. The manager selects 15 tellers at random and records
their years of work experience and their quality rating (as assessed by their supervisors).
The quality rating scheme is as follows: 5 = excellent, 4 = very good, 3 = average, 2 = fair,
and 1 = poor. The information for the 15 tellers is printed below.
Can we infer from these data that years of work experience is related to the quality of
work performed? Use α = .10. Please do your calculations in Excel or by hand, not in
EViews. One of the main objectives of this question is to understand how the appropriate
statistic is constructed.

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 Teller Experience Rating Teller Experience Rating
1 1 1 9 7 5
2 1 2 10 8 3
3 2 2 11 8 4
4 4 4 12 9 3
5 5 3 13 10 2
6 5 5 14 15 4
7 6 3 15 20 5
8 6 4

PART B Exercises to be completed during the tutorial, but you are free to try
them yourself beforehand if you wish.

Question B1
This exercise uses the data in file XR21-75.xls that comes with Edition 4 of the Sel-
vanathan et al textbook on the CD-rom (XR18-75.xls of the third edition). You can also
download this file from the LMS, in the “Data for Tutorials” folder under the “Tutorials”
section for this subject.

Background:
One general belief held by observers of the business world is that taller men earn more
money than shorter men. In a study reported in the Wall Street Journal, 30 MBA graduates,
all about 30 years old, were surveyed and asked to report their annual incomes (in $US)
and their heights (in centimetres). This information is recorded in the Excel file, with
“height” in the first column and “income” in the second column.
Here are the tasks to complete:

a In EViews, plot the data of “income” and “height” in a scatter plot. Does the relationship
between the two variables look positive or not?

b In EViews, calculate the sample regression line, where your dependent variable y is
income, and the independent or explanatory variable x is height.

c Interpret the estimated coefficients from the regression.

d Do these data provide sufficient statistical evidence to infer at the 5% significance level
that taller MBAs earn more money than shorter ones? Assume that the required
conditions for using OLS hold.

e Construct simple descriptive statistics for the two variables (height and income) and
note the sample means for each variable.

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f Show yourself that the estimated regression line passes through these sample means, i.e.
y = βb0 + βb1 x.

g The residuals from your estimated regression have been placed by EViews automati-
cally in the data series entitled “resid” in the workfile. Construct simple descriptive
statistics for this series of regression residuals to show yourself that the mean of the
residuals (and thus also their sum) equals zero (or incredibly close to it).

Some tips for doing these tasks in EViews:

1. To construct a scatter plot, do the following after loading in your data. In the workfile
window, select your x variable “height”, then while holding down the “Ctrl” key,
select your y variable “income”. The two variables should be highlighted. Then
right click your mouse and a pop-up box should appear. Choose “Open” then “as
group”. The two variables should appear in spreadsheet view. Click on “View” in
this window, then “Graph”, then “Scatter” then “Simple scatter”. Your scatter should
appear with height on the horizontal axis and income on the vertical axis, like we
want.

2. To calculate a regression in EViews, do the following. In the workfile window, select

your y variable, then while holding down the “Ctrl” key, select your x variable. The
two variables should be highlighted. Then right click your mouse and a pop-up
box should appear. Choose “Open” then “As equation...”. A box should appear
denoted “Equation specification”. It should read “income height c”. This denotes
that you are running a regression of the equation with “income” on the left hand
side (y variable) and “height” plus a constant “c” on the right hand side. EViews
automatically includes a constant “c”. This variable “c” will have the intercept term
βb0 estimated as its coefficient. If “income” (your y variable) is not the first variable
in the equation list, change the equation so it is. Below this box is another entitled
“Estimation settings”. Under “Method” it should read “LS - Least Squares (NLS
and ARMA)”. This denotes that EViews is going to estimate the equation using
ordinary least squares, which is what we want to do here.

3. To calculate simple summary statistics for your variables, select your variables and
open them as a group. Click on “View” then “Descriptive Stats” then “Common
Sample”. A whole array of summary statistics should appear, the same ones that
appear if you had constructed “Histogram and stats” for each variable separately
like in previous tutorials.