Week – 10

Here the explanatory variable is total wealth (in dollars) and age (in years) is the response variable.

a.

The regression equation will be of the form,

y=β0+β1x+e  ,
Now, we have to estimate the coefficients of the equation using least square method.

Applying least square method,

β1=covx,ySx2 and β0=y-β1x

X=1ni=1nxi, Y=1ni=1nyi
Now, we have the estimated values as,

45.2159
β0

5.3265
β1
The estimated regression equation is,

(Total wealth) y = 45.2159+5.3265 x (Age)

b.

Now, at the person’s age of 50 years, we have to estimate the total wealth. We replace x=50

Then, the estimated wealth =311.5409 dollars.

c.

The coefficient of determination is given by,

r2=SxySxxSyy

Sxx=1n-1i(xi-x)2  =sample variance of x

Syy=1n-1i(yi-y)2  = sample variance of y

covx,y=1nixiyi-xy  = population covariance between x and y.

Sxy=1n-1ixiyi-xy  = covariance of sample between x and y

Coefficient of determination has the value equal to =0.9146

Interpretation:
          91.46% of the total variability is explained by the estimated regression model.

d.

          Now, here the extent of relationship between the person’s age and wealth is computed at the significance
level of 10%.

Hypothesis to be tested:
          We want to test,

i)H01:the model with no independent variables fits the data

H11:not H01

ii)H02:β0=0 ag. H12:β0≠0

iii)H03:β1=0 ag. H13:β1≠0
Test Statistics:

i) H01 test statistics is  ag. H11 given by,

F=MS due to regressionMS due to residual  follows Fα;1.6

ii) H02 test statistics is  ag. H12  given by,

For testing H02, the appropriate statistics is , t1=β0-β0SE(β0) follows t distribution having a df value,

under the null hypothesis H02  .

iii)The test statistic for testing H03  ag. H13  is given by,

The appropriate test statistic for testing H03  is, t2=β1-β1SE(β1)  follows t distribution

having a df value, under the null hypothesis H03  .

Calculations:

F=51907.64840.3936=61.7658
t1=45.215939.8049=1.1359

t2=5.32650.6777=7.8596
Critical values:

We take α=0.05.
Then F0.05;1.6=5.9873

t0.05;6=1.9432
Here to calculate the critical value we use Excel .Inv() function.

Conclusion:
Here, the critical value is less than the value of F statistic, hence, the null hypothesis is rejected and it is
concluded on the basis of the given data that the model fits the data moderately.

And, |t1|  < t-critical and |t2|  >t-critical.

Hence, we accept that, β0=0 and β1 is not equal to zero

 . i.e. the age has significant effect in predicting

the wealth but the intercept has no significant effect in predicting the wealth.