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# AMR Assignment

## Submitted To: Submitted By:

Dr. Prabhat Pankaj Sushma Kumari
FT-08-755

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Model 1:
Yt = a1 + a2 X2t + a3 X3t + a4 X4t + a5 X5t + ut
here Yt is predicted value of sales of roses.
Model 2:
InYt = b1 + b2 InX2t + b3 InX3t + b4 InX4t + b5 InX5t + ut

A.Estimate the parameters of the linear model and interpret the results.
Y = quantity of roses sold, dozens
X2 = average wholesale price of roses, \$/dozen
X3 = average wholesale price of carnations, \$/dozen
X4 = average weekly family disposable income, \$/week
X5 = the trend variable taking values of 1,2, and so on, for the entire period.
Here Y is dependent variable, a1, a2,a3,a4, a5 and b1,b2,b3,b4 b5 are coefficients of
different-different independent variables. And we have to find the effect of independent
variable on dependent variable (sales of roses) so here we use regression model.
Regression analysis is a mathematical model that can be used to predict one variable by another.
Spss analysis of regression function is as follows.

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Model Summary

## Adjusted R Std. Error of the

Model R R Square Square Estimate Predictors:
1 (Constant),
.882a .778 .722 1076.29087 disposable_income,
price_carnation, price_rose
ANOVA
Sum of
Model Squares Df Mean Square F Sig.
1 Regression 4.870E7 3 1.623E7 14.012 .000a
Residual 1.390E7 12 1158402.031
Total 6.260E7 15
a. Predictors: (Constant), disposable_income, price_carnation, price_roses
a. Dependent Variable: roses_demand

Analysis:
Here from model summary we can analyze that 77.8% of sales of roses explained by all independent
variable. Coefficient of correlation between dependent and exploratory variables is also very high
i.e. .882.
Adjusted R2 should be defined where there would be more than one independent variable Adjusted R2
shows the changes in R2 when we add an another independent variable in exploratory variables.
Here it is lower than coefficient of determination (R2) which is 72.2, which shows there is some
problem
in data and there can be multicollinearity problem between independent variable.
Annova is significant since significant level is less than .05, which shows this model has at least one
variable which is good.

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Coefficients

## Unstandardized Standardized Collinearity

Coefficients Coefficients Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) 13354.602 6485.419 2.059 .062
price_roses -3628.186 635.628 -.955 -5.708 .000 .661 1.513
price_carnation 2633.755 1012.637 .419 2.601 .023 .713 1.402
disposable_income -19.254 30.695 -.093 -.627 .542 .842 1.188
a. Dependent Variable:
roses_demand

Now from this table we can put the value of coefficient of independent variable with respect to
dependent variable which is as follows

## Y= 13354.602 -3628.186X2 +2633.755X3 -19.254X4 +Ui

Here negative sign of variable X2 shows if prices of roses would be increased then demand of roses
would be decreased that means there is inverse relation.

Positive sign of coefficient of carnation with respect to demand of roses shows if price of carnation will
increase then demand of roses would be increased it is substitute effect as roses are substitute for
carnation.

Negative coefficient of disposable income with respect to demand of roses which shows if disposable
income will increase then demand of roses will decrease, which shows it is inferior good.

Significant variable

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Only two of them is significant since p -value is less than .05, which are price of roses and price of
carnation. Other are insignificant that means demand of roses is not as much as explained by disposable
income

## Now from collinearity statistics

Here Tolerance and VIF (Variance inflated factor) both quantifies the severity of multicollinearity. We
can analyze it by the size of VIF if it is greater than 2 then there is multicollinearity.

Tolerance is inverse of VIF. It is proportion of variance which is not explained by other factor. That
means low tolerance is bad so it should be high so a tolerance of less than .20 shows multicollinearity
problem. Here tolerance for all independent variable is high, and VIF is lower than 2 which shows there
is no multicollinearity problem.

Collinearity Diagnostics

## Dimen Condition Variance Proportions

Model sion Eigen value Index (Constant) price_roses price_carnation
1 1 1.986 1.000 .01 .01
2 .014 12.016 .99 .99
2 1 2.981 1.000 .00 .00 .00
2 .015 13.998 .14 .91 .04
3 .004 27.644 .86 .09 .96
a. Dependent Variable: roses_demand
Collinearity is linear relationship between two explanatory variables, if correlation between two
independent variable is very high which shows data is suffering from multicollinearity problem.

Condition Index:-

To check whether there is case of multi co linearity we have that if the value of condition index is
greater than 15 than there is a problem of multi co linearity. The correspondence values of three factors
(price of rose bundle, carnation price, income) are 15.175, 21.515, and 63.305 respectively.

Here all the values are greater than 15 so there is the problem of multi co linearity.

Eigen Value:-

Eigen value shows the collinearity between independent variables by linear combination. it is important
factor to test multi collinearly. it explains the variance explained by particular factor the values of three

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factors (price of rose bundle, carnation price, income) are 0.017,0.006 and 0.001 these values are less
than 1 hence there is a problem of multi co linearity.

From graph we can see demand of roses is very indifferent in different quarter which shows data is
inconsistent.

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B. Estimate the parameters of the log-linear model and interpret the results

Model Summary

Mode R Std. Error of the R Square Sig. F
l R R Square Square Estimate Change F Change df1 df2 Change
1 .859a .737 .672 .17587 .737 11.224 3 12 .001

## a. Predictors: (Constant), price_rose, disposable, prise_carnation

b. Dependent Variable:
roses_demand
Here R2 is .737 that means 73.7% of dependent variable is defined by all independent variable.
And we have to find the effect of independent variable on dependent variable (sales of roses) so here
we use regression model. Regression analysis is a mathematical model that can be used to predict one
variable by another.
Now Spss analysis of regression function is as follows.
Analysis:
Here from model summary we can analyze that 77.8% of sales of roses explained by all independent
variable. Coefficient of correlation between dependent and exploratory variables is also very high
i.e. 0.859.
Adjusted R2 should be defined where there would be more than one independent variable. Adjusted R2
shows the changes in R2 when we add an another independent variable in exploratory variables. Here it
is lower than coefficient of determination (R2) which is 67.2%. Annova is significant since significant
level is less than .05, which shows this model has at least one variable which is good.

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ANOVAs
Sum of
Model Squares df Mean Square F Sig.
1 Regression 1.041 3 .347 11.224 .001a
Residual .371 12 .031
Total 1.413 15
a. Predictors: (Constant), price_rose, disposable, prise_carnation
b. Dependent Variable: roses_demand

Coefficientsa
Unstandardized Standardized
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) 6.288 4.875 1.290 .221
disposable .560 .921 .102 .607 .555 .783 1.277
prise_carnation 1.454 .572 .455 2.540 .026 .682 1.467
price_rose -1.856 .344 -1.028 -5.399 .000 .604 1.655
a. Dependent Variable: roses_demand

## Ln Y= 6.288-1.856 lnX2+1.454lnX3+0.560 lnX4

Here Tolerance and VIF (Variance inflated factor) both quantifies the severity of multicollinearity. We
can analyze it by the size of VIF if it is greater than 2 then there is multicollinearity.

Tolerance

TOLERANCE = 1-R2

Tolerance is inverse of VIF. It is proportion of variance which is not explained by other factor. That
means low tolerance is bad so it should be high so a tolerance of less than .20 shows multicollinearity
problem. Here tolerance for all independent variable is high, and VIF is lower than 2 which shows there
is no multicollinearity problem.

VIF

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VIF = 1/tolerance
here VIF of three independent variables are 1.277,1.467,1.655. which are lower than 2 which shows
there is no problem of multicollinearity.

Collinearity Diagnosticsa
Variance Proportions
Dimen Condition prise_carnatio
Model sion Eigenvalue Index (Constant) disposable n price_rose
1 1 3.983 1.000 .00 .00 .00 .00
2 .014 16.887 .00 .00 .00 .65
3 .003 34.396 .00 .00 .85 .14
4 4.149E-5 309.823 1.00 1.00 .15 .21
a. Dependent Variable: roses_demand

Condition Index:-

To check whether there is case of multi co linearity we have that if the value of condition index is
greater than 15 than there is a problem of multi co linearity. The correspondence values of three factors
(price of rose bundle, carnation price, income) are 16.887, 34.396, and 309.823 respectively.

Here all the values are greater than 15 so there is the problem of multi co linearity.

Eigen Value:-

Eigen value is important factor to test is effected by multi collinearly. it explains the variance explained
by particular factor the values of three factors (price of rose bundle, carnation price, income) are
0.014,0.003 and 4.149E-5 these values are less than 1 hence there is a problem of multi co linearity.

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From graph we can analyse that data is consistent. That means demand of roses is quite constant in all
quarter.

C .b2, b3, and b4 give, respectively, the own-price, cross-price, and income-elasticities of demand.
What are their a priori signs? Do the results concur with the a priori expectations?

Here b2, b3, b4 are coefficients of price of roses , price of carnation and disposable income with respect
to demand of roses , in which coefficient of roses is negative which shows there is own price elasticity
and demand of roses would be less if prices of roses would be increased, and there is positive sign prior
to b3 which shows if price of carnation would be increased then demand of roses would be increased
which shows cross price elasticity, and prior sign of b4 which is positive which shows income-

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elasticity effect that shows there is direct relation between disposable income and demand of roses. If
disposable income would be increased by one unit then demand of roses would be increased by .566.

## These all results of elasticity is as per the expectations.

D . How would you compute the own-price, cross-price, and income-elasticities for the linear
model?

## Mean of all variables

Y X2 X3 X4
7645 3.10687 3.43187 180.53437
5 5 5
Now Own price elasticity

It shows there is inverse relation between price of roses and demand of roses. Which can be obtained by
as follows.

## Own price elasticity

= dY/dX2*X2/y dy/dx2=-3628.186

=-3628.186*3.106875/7645

=-1.474

Negative sign shows there is inverse relation between demand of roses and price of roses. That means if
there would be change of one unit of price of roses then demand would be decreased by 1.474 unit.

## Cross price elasticity

=dy/dx3*x3/y

=2633.755*3.431875/5645 Dy/dx3=2633.755

=1.18230

Here positive sign shows there is direct relation between price of roses and demand of roses. That means
if price of carnation would be increased by 1unit then demand for roses would be increased by 1.18230
unit.

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Income elasticity

=dy/dx4*x4/y

=-19.254*180.534/7645

=-.4546

Dy/dx4=19.254

Here negative sign shows that there is inverse relation between disposable income and demand of roses
which is not as expected since increase in disposable income means increase in demand of roses. So
there could be two possibility either roses are inferior good or data is suffering from multicollinearity
problem.

E. On the basis of your analysis, which model, if either, would you choose and why?
If we compare both model and analyze according to the F-model, adjusted R2 and graph, then
we come to conclusion as follows……………………………………….

## Ln Y= 6.288-1.856 lnX2+1.454lnX3+0.560 lnX4

The value of adjusted R2 in linear model is .722 and in log linear model .672. and we know that the
model with the highest adjusted R2 value is consider as the best model.

F-value

In case of F-value the linear model has 14.12 value and log linear model has 11.224, so the first one is
good because both have same significant .

So from both value we come to conclusion that linear model is better model since independent variable
is mostly explained by linear model

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F. Discuss the uses of the above two model estimations in establishing and expanding business for
roses.

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Variables Entered/Removed
Variables Variables
Model Entered Removed Method
1 Stepwise
(Criteria:
Probabili
ty-of-F-
to-enter
price_roses . <= .050,
Probabili
ty-of-F-
to-
remove
>= .100).
2 Stepwise
(Criteria:
Probabili
ty-of-F-
to-enter
price_carnatio
. <= .050,
n
Probabili
ty-of-F-
to-
remove
>= .100).
a. Dependent Variable: roses_demand

Here from above regression analysis we found that only two independent variable is significant and
other two are not significant. And most percentage of independent variable is explained by this only two
variable. And since from sign of coefficients we can amylase that there is inverse relation between
disposable income and demand of roses. Which is not as expected so there is some problem with
data and data is suffering from multicollinearity . So there is solution to remove this problem to do
stepwise regression model. By which independent variable can be mutually exclusive to each other.
So here price of roses is more significant than other independent variable, and other one is price of
carnation

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Model Summary
Change Statistics

F
Mode R Adjusted R Std. Error of R Square Chang Sig. F
l R Square Square the Estimate Change e df1 df2 Change
1 22.35
.784a .615 .587 1312.19426 .615 1 14 .000
4
2 .878b .771 .735 1050.88327 .156 8.828 1 13 .011
a. Predictors: (Constant),
price_roses

Model summary
Here model is good enough since p-value for both independent variable is significant.
In 1st step when 1st independent variable price of roses is explaining 61.5% of dependent
variable and its correlation with independent variable is .784. And adjusted R2 is .587. Now in
second step when we add one another independent variable which is price of carnation then
adjusted R2 will increase which shows that price of carnation is significant variable and both
independent variable are good factor to analyze the demand of roses.

## So for business of roses these two independent variable should be considered.

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Annova

Sum of
Model Squares df Mean Square F Sig.
1 Regression 3.849E7 1 3.849E7 22.354 .000a
Residual 2.411E7 14 1721853.767
Total 6.260E7 15
2 Regression 4.824E7 2 2.412E7 21.841 .000b
Residual 1.436E7 13 1104355.652
Total 6.260E7 15
a. Predictors: (Constant), price_roses
b. Predictors: (Constant), price_roses, price_carnation

## c. Dependent Variable: roses_demand

Coefficientsa
Unstandardized Standardized
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) 16898.969 1984.567 8.515 .000
price_roses -2978.546 629.979 -.784 -4.728 .000 1.000 1.000
2 (Constant) 9734.217 2888.059 3.371 .005
price_roses -3782.196 572.455 -.996 -6.607 .000 .777 1.287
price_carnation 2815.252 947.511 .448 2.971 .011 .777 1.287
a. Dependent Variable: roses_demand
TOLERANCE = 1-R2

Tolerance is inverse of VIF. It is proportion of variance which is not explained by other factor. That
means low tolerance is bad so it should be high so a tolerance of less than .20 shows multicollinearity
problem. Here tolerance for all independent variable is high, and VIF is lower than 2 which shows there
is no multicollinearity problem.

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VIF

VIF = 1/tolerance here VIF of three independent variables are 1.000,1.287, 1.287. Which are lower than
2 which shows there is no problem of multicollinearity.
Which shows this data is sufficient and good to analyze the relation between demand of roses and and
other independent factor i.e. price of roses and price of carnation.
Advantages or uses of this research model
• We can predict the demand flow of roses with the changes of different factor on this (demand
of roses). so we can take take appropriate measure to establish our businesses of roses.
• By prediction of errors and insignificant variable we can rectify this or take less consideration
of this variable with respect to other significant variable.
• As we measured own- price, cross-price, and income elasticity, by which we can quantify that
changes in independent variable how much effect on dependent variable.
• By this research method we take appropriate solutions and can be prepare for future problem.

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