Tutorial Covering Topic 10 - Solutions-Update-3

RMIT Classification: Trusted
[Document title]
Tutorial covering Topic 9: Simple Linear regression
Questions for in-class tutorial:
Q1. A transport consultant wishes to explore the relationship between air travel and ticket
prices. The dependent variable is the number of air passengers in 000s and the
independent variable is average ticket price in $s. She collects data over a 12-month
period and estimated the following output:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.94
R Square 0.88
Adjusted R Square 0.87
Standard Error 57.57
Observations 12
ANOVA
df SS MS F Significance F
Regression 1 247024.6 247024.6 74.53907 6.0035E-06
Residual 10 33140.29 3314.0
Total 11 280164.9
Coefficients
Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 2070.61 150.40 13.77 0.00 1735.50 2405.72
X Variable 1 -11.83 1.37 -8.63 0.00 -14.88 -8.78
a. Use the dataset Passengers and ticket price.xls to construct a scatter plot of number
of passengers against ticket prices on Excel. Comment on the relationship between
the two variables.
[Document title]
scatter plot of number of passengers and ticket price

1200
Passengers ('000) 1000
800
600
400
200
0
90 95 100 105 110 115 120 125 130 135 140
Average ticket price ($)
We observe a negative relationship between the number of passengers (Y) and ticket price
(X). As expected, when the price of ticket goes up, the number of passengers decline.
b. Use the dataset to estimate the above regression using the Data Analysis Toolpak.
c. Interpret the meaning of the slope.
An increase in the average ticket price will on average be associated with a decline
of 11,830 air passengers.
d. Predict the number of air passengers if the average ticket price is $110.
^
Passenger=2070.61−11.83× 110=769.31
So the predicted number of passengers is 769,310.
e. Interpret the coefficient of determination.
87% of the variation in the number of passengers can be determined by the

variation in the price of the airline ticket.
f. At the 5% level of significance, is there evidence of a linear relationship between the
passenger numbers and ticket price?
H 0 : β 1=0
H 1 : β1 ≠ 0
α =0.05
The sampling distribution will be from the student-t distribution with 10 degrees of
freedom.
For a two-sided test at the 5% level of significance and 10 degrees of freedom, the
critical t values are 2.2281 and -2.2281.
We will reject H0 if t > 2.2281 or t < -2.2281 and fail to reject H0 otherwise.
[Document title]
^β1 −β1 −11.83−0

t= = =−8.63
S ^β 1.37
1
Since the t-statistic is in the rejection region we conclude at the 5% level of

significance that the airline ticket price is a statistically significant predictor of the
number of airline passengers.
g. What other independent variables might you consider for inclusion in the model?
It is possible that average weather conditions, prices of alternate forms of

transportation (bus, train) or economic performance variables (eg GDP, exchange
rate) may be factors in the number of passengers.
Q1. It seems logical that the more bank accounts there are, the more Automated Teller
Machine (ATM) withdrawals there will be. The Reserve Bank of Australia (RBA) has
performed a simple regression analysis to predict the number of ATM withdrawals by the
number of bank accounts (in ‘000). The Excel output is given below.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.504
R Square 0.254
Adjusted R Square 0.179
Standard Error 2889.685
Observations 12
ANOVA
df SS MS F Significance F
Regression 1 28403158.08 28403158.08 3.401461041 0.094926942
Residual 10 83502817.59 8350281.759
Total 11 111905975.7
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -47109.624 63582.514 -0.741 0.476 -188780.292 94561.045
Number of accounts ('000) 4.357 2.362 1.844 0.095 -0.907 9.620
a. Write down the estimated regression equation.
^
Withdrawals=−47109.62+ 4.357 × Accounts
b. Interpret the slope coefficient.
An increase of 1000 bank accounts is associated with a 4.357 increase in the

number of ATM withdrawals.
c. What is the value of the r 2? Interpret the result.

[Document title]
The R square of 0.254 indicates that 25.4% of the variation in the number of ATM
withdrawals can be explained by the variation in the independent variable
(number of accounts)
d. Is the “Number of accounts” a significant predictor using the 5% level of significance?
H 0 : β 1=0, number of accounts does not predict number of ATM withdrawals

H 1 : β1 ≠ 0, number of accounts predicts number of ATM withdrawals
α =0.05
The sampling distribution will be from the student-t distribution with 10 degrees of
freedom. (10 = the number of observations - the number of independent variables
– 1 = 12-1-1)
For a two-sided test at the 5% level of significance and 10 degrees of freedom, the
critical t values are 2.2281 and -2.2281.
We will reject H0 if t > 2.2281 or t < -2.2281 and fail to reject H0 otherwise.
^β −β 4.357−0
1 1
t= = =1.844 (You can also read this number from the output
S ^β 2.362
1
table.)
Since the t-statistic is not in the rejection region we do not reject the null.
At the 5% level of significance the number of accounts is not a statistically
significant predictor of the number of ATM withdrawals.
e. Predict the number of ATM withdrawals if the number of accounts is 27,700,000.
^
Withdrawals=−47109.62+ 4.357 ×27700=73,579.30

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RMIT Classification: Trusted

Tutorial covering Topic 9: Simple Linear regression

Questions for in-class tutorial:

scatter plot of number of passengers and ticket price

Passengers ('000) 1000

e. Interpret the coefficient of determination.

87% of the variation in the number of passengers can be determined by the

^β1 −β1 −11.83−0

Since the t-statistic is in the rejection region we conclude at the 5% level of

It is possible that average weather conditions, prices of alternate forms of

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

a. Write down the estimated regression equation.

b. Interpret the slope coefficient.

An increase of 1000 bank accounts is associated with a 4.357 increase in the

c. What is the value of the r 2? Interpret the result.

d. Is the “Number of accounts” a significant predictor using the 5% level of significance?

H 0 : β 1=0, number of accounts does not predict number of ATM withdrawals

e. Predict the number of ATM withdrawals if the number of accounts is 27,700,000.

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