Statistical Inference regarding Simple linear Regression In statistical inference will discuss the testing of hypothesis regarding the

parameters of regression equation or model. Testing of hypothesis about the , the population regression coefficient Suppose we want to test the hypothesis that regression coefficient having specified value 0 Let a random sample of n pairs observations from the bivariate normal population and estimate the regression model Y = a + b X, Where a is the intercept and b is the slope or regression coefficient. The sample estimate of the regression coefficient is normally distributed with the mean and the standard deviation ( ) , where to be estimated from the sample data. The statistic

Where Sb is the sample estimate of the standard deviation of , which is defined as

The statistic t follows a students t-distribution with n-2 degree of freedoms. This statistic is therefore used to test the hypothesis H0 : = 0 and the testing procedure is as follow a) Formulation of Null and Alternative Hypothesis There are following possibilities of the hypothesis H0: = 0 and H1 : 0 H0: 0 and H1 : > 0 H0: 0 and H1 : < 0 b) Decide on the level of significance . c) The Test-statistics to use is which, if H0 is true, has a t-distribution with n-2 degree of freedoms d) Computation: Compute the value of t-statistic, from the sample data. e) The Critical region is

f)

Reject H0, if | | t/2,(n-2), When H1 is 0 Reject H0, if t > t, (n-2), When H1 : > 0 Reject H0, if t <- t, (n-2), When H1 : < 0 Decision: Decision is as follow, Reject H0 if the computed value of t false in the Critical region otherwise do not reject H0.

Exercise The vice president for research and development of large chemical and fiber manufacturing believes that the firms annual profits depend on the amount spend on R&D. The new chief executive officer does not agree and has asked for evidence. The data for six years is

Year 1990 1991 1992 1993 1994 1995 Required

Million Spend on R&D 2 3 5 4 11 5

Annual Profit 20 25 34 30 40 31

a) Fit a least square line between the million spend on R&D and annual profit. b) Find the coefficient of correlation. c) Test the hypothesis of H0: = 0. Solution: The fitted regression line is = Where

Years 1990 1991 1992 1993 1994 1995 Total

Spend on R&D X 2 3 5 4 11 5 30

Annual Profit Y 20 25 34 30 40 31 180

XY 40 75 170 120 440 155 1000

X2 4 9 25 16 121 25 200

Y2 400 625 1156 900 1600 961 5642

Also

Therefore the estimated regression is

b) The coefficient of correlation is

XY X Y n X X n Y Y
2 2 2

On computation we get

r = 0.909090

iii) To test hypothesis H0: = 0, following is the procedure a) Formulation of H0 and H1: H0: = 0 and H1 : 0 b) = 0.05 c) test statistics d) Computation As the estimated line is

Now

(
Where

s y.x

2 Y a Y b XY

n2

To find the values of Sy.x, putting the values in above formula, we get

Now

Therefore

C.R Reject Ho: if Reject H0, if | | t/2,(n-2), because H1 is 0

From t- table available on page 244 of Shar Mohammad Chaudary, we get t/2,(n-2 = t 0.025(4) = 2.776 Conclusion As tcomp = 10.691 is more than the tabulated value of 2.776, so we reject our null hypothesis and concluded that 0.s