336 Final Review Notes

Regression
Goal: identify the function that describes the relationship between a continuous
dependent variable and one or more independent variable(s)
SLR = Simple Linear Regression involves 1 variable
MLR = multiple Linear Regression involves more than 1 variable

SLR
We are trying to estimate: Y= B0 + B1X
Where Y = dependent variable
B0 = True y-intercept
B1 = True Slope (the amount by with the line rises/falls per increase in an additional
unit)
X = Independent Variable
Estimated Function: = b0 + b1X
HOW TO SOLVE:
1. Identify the Dependent Variable (Y) and Independent Variable (X)
2. Create a Scatterplot and look for general linear regression
3. SOLVE using regression on a calculator
a. Calculate and generate co-efficient of the best fit line, which are b o
(a) and b1 (b)
i. a or b0 = estimated y-intercept: math: the value of y when x=0;
or means that if you do not study, on average you will receive
33.41%
ii. b or b1 = estimated slope: math: the rate of change in y as x
increases by 1; or for every additional hour studied, we would
expect on average that the final grade would increase by .
8225%
4. Evaluate the Quality of the model by using:
a. Coefficient of Correlation (r) describes how strong the linear
relationship is. If r is between -1 r 1, the linear relationship is
strong
b. Coefficient of Differentiation (r) describes the goodness of fit. If r 2 is
between 0 r2 1, the fit of the model is good.
i. R2 = ___% of variability in predicting the (dependent variable) is
explained by knowing the (independent variable)
ESS
-

Error Sum of Squares

Always non-negative thus ESS 0
IF ESS = 0, then Y1 - 1 = 0 means a perfect fit with is RARE
Thus, our goal is to minimize ESS as close to zero to find the best b 0 and b1 by
using method of least squares (TSS = RSS + ESS)
Regression Report RSS is the regression ss, ESS is the residual ss, and TSS is
the total ss

Hypothesis Testing
1. Hypothesis
a. H0 = 0 (means that there is no linear relationship between x and y)
b. Ha 0 (means that there is a linear relationship that exists between x
and y)
c. = 0.05 (level of significance)
2. Decision Rule (3 Methods)
i. T-TEST
a. We REJECT H0 if ttest > -t/2 or ttest > t/2
b. Ttest = (b1 B1)/ Se(b1)
c. T-chart!! Df = n-2 where n = sample size
d. *NOTE* two-tailed
ii. USING P-VALUES
a. REJECT H0 if p-value <
b. We estimate the p-value by using the t-table (the upper tail area
probability)
c. *NOTE* two-tailed, make sure to multiple each probability by 2
iii. 95% CONFIDENCE INTERVAL
a. CI = b1 + t/2 (Seb1)
b. REJECT H0 if Confidence Interval DOES NOT contain 0
3. Draw a Conclusion

MLR (Multiple Linear Regression)

-

Linearity best fit line

Normality every value of X is normally distributed around the regression
Homoscedasticity random patterns of residual error
Independence of errors any error is independent from other errors
b1 represents the change in y with an increase in one unit of x, when all other
variables are held constant
Evaluating Regression Models:
o Adjusted R2
o Hypothesis Testing -> Overall Significance (only used before
performing backwards ML)

Forward Regression
Determining the best model by finding SLR of X 1; then finding X1 + X2 and X1 + X3,
finding the best model, then finding X1 + X2 + X3 then evaluating which model is
best by adjusted r2 and amount of violations.

Multicolinearity

We want y(dependent) and x (independent) variables to by highly correlated,

however multicolinearity means that independent variables (Xs) are
correlated with each other
CAUSES: regression coefficients to have the wrong sign, t-values too small,
and p-values too big.
SOLVE WITH: overall significances F Test (first) and Correlation Matrix (last)

Backward Multiple Regression

1. Overall F-Test to determine if at least 1 independent variable is a significant
predictor
a. Hypothesis: H0 = B1 = B2 = B3 = 0 (meaning all variables are
unimportant to predict)
Ha = At least one Bk 0 (meaning at least one variable is
important at predicting)
b. Decision Rule: P-value approach: REJECT H 0 if p-value <
c. Make a conclusion in Business Context based on this test, a 5% level
significance, we can say that AT LEAST one of the independent
variables is significant in predicting the dependent variable.
2. Continue to re-run and remove independent variables that have violates, eg.
If their p-values <
3. Check MULTICOLLINEARITY with Correlation Matrix
a. Anything that is over 0.6 may present a problem
b. Check the signs of the coefficients of the correlation matrix with the
coefficients of your regression model for incorrect signs

Dummy Variables

All coefficients are relative to the reference (dummy) variable

o Eg. If the coefficient is -17, that variable sells 17 less units than the
reference variable
o SEE LECTURE NOTES EXAMPLE

Linear Programming (LP)

1.
2.
3.

A decision to be made with the respect to allocation of resources

Constraints
An objective function such as maximizing profits or minimizing costs
Problems with 2 decision variables can be solved graphically

STEPS:
1. Define the decision variables
2. State the Objective Function
3. State the Constraints
4. State the Non-Negativity Constraints
5. FOR 2 DECISION VARIABLES ONLY
a. Graph the relationships
b. Find the feasible area
c. Location the optimal point by using the objective function
d. Identify the constraints involved with the optimal point and solve

Special LP Conditions
1. Alternate Optimal Solutions more than one best solution
2. Redundant Constraints plays NO part in determining the feasible area
3. Unbounded Solutions solution with infinitely large or small solution, no limit
to the decision variables

4. Infeasibility No way to satisfy all constraints; no feasible area

100% Rule
Sensitivity report is valid if: 2 or more objective function coefficients change
simultaneously or 2 RHS constraints change simultaneously
Eg. P= 20X1 + 30X2 ; X1 drops $2 and X2 increases $5
2/5 + 5/10 ; where 5 is the allowable decrease for X 1 and 10 is the allowable
increase for X2
= 9/10 = 90% THUS, 90% < 100% thus the sensitivity report is valid

Value of Objective Function; in

this case, maximum profits
with optimal solution

Answer Report

Optimal Solution

Slack the amount of

resources that is not
being used (helps
determine binding/nonbinding constraints)

Sensitivity Report

Reduced Cost For every production of this

product, profits are reduced by this much;
item must contribute this amount to
improve optimal solution

Shadow Price the maximum price to pay

for one more unit; amount that increases
objective function with one more unit

Max change in
objective
coefficients
without
changing the
optimal
solution
(objective
function still
changes tho)
Max change in
RHS
constraints
without
changing the
optimal
solution
(objective