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Basic Estimation Techniques: Eighth Edition

This document discusses techniques for basic estimation in managerial economics, including simple linear regression, the method of least squares, sample regression lines, unbiased estimators, relative frequency distributions, statistical significance testing using t-tests and p-values, the coefficient of determination, F-tests, multiple regression, quadratic regression models, and log-linear regression models. It provides equations and definitions for key terms in 3 sentences or less.

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198 views

Basic Estimation Techniques: Eighth Edition

This document discusses techniques for basic estimation in managerial economics, including simple linear regression, the method of least squares, sample regression lines, unbiased estimators, relative frequency distributions, statistical significance testing using t-tests and p-values, the coefficient of determination, F-tests, multiple regression, quadratic regression models, and log-linear regression models. It provides equations and definitions for key terms in 3 sentences or less.

Uploaded by

bhuvaneshkmrs
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Managerial Economics Thomas

eighth edition Maurice

Chapter 4

Basic Estimation
Techniques
The McGraw-Hill Series
2 Managerial Economics

Simple Linear Regression


• Simple linear regression model relates
dependent variable Y to one
independent (or explanatory) variable X
Y  a  bX
• Intercept parameter (a) gives value of Y
where regression line crosses Y -axis (value
of Y when X is zero)
• Slope parameter (b) gives the change in Y
associated with a one-unit change in X,
b  Y / X
2 The McGraw-Hill Series
3 Managerial Economics

Method of Least Squares


• Parameter estimates are obtained by
choosing values of a & b that minimize
the sum of squared residuals
• The residual is the difference between the
actual & fitted values of Y , Yi  Yˆi
• The sample regression line is an
estimate of the true regression line
ˆ
Yˆ  aˆ  bX

3 The McGraw-Hill Series


4 Managerial Economics
Sample Regression Line
(Figure 4.2)
S

70,000 Si  60,000 Sa m p le re g re ssio n line


60,000
• Ŝi  11, 573  4 . 9719 A

50,000
ei •
Sales (dollars)

40,000
•
Ŝi  46,376
30,000
• •
20,000
•
10,000
•
A
0 2,000 4,000 6,000 8,000 10,000

Advertising expenditures (dollars)

4 The McGraw-Hill Series


5 Managerial Economics

Unbiased Estimators
• The estimates of â & bˆ do not generally
equal the true values of a & b
• â & bˆ are random variables computed using
data from a random sample
• The distribution of values the estimates
might take is centered around the true
value of the parameter
• An estimator is unbiased if its average
value (or expected value) is equal to the
true value of the parameter
5 The McGraw-Hill Series
6 Managerial Economics
Relative Frequency Distribution
(Figure 4.3)

Relative frequency of b̂

0 1 2 3 4 5 6 7 8 9 10
ˆ
Least-squares estimate of b (b)

6 The McGraw-Hill Series


7 Managerial Economics

Statistical Significance
• Must determine if there is sufficient
statistical evidence to indicate that
Y is truly related to X (i.e., b  0)
• Even if b = 0 it is possible that the
sample will produce an estimate b̂
that is different from zero
• Test for statistical significance
using t-tests or p-values
7 The McGraw-Hill Series
8 Managerial Economics

Performing a t-Test
• First determine the level of
significance
• Probability of finding a parameter
estimate to be statistically different
from zero when, in fact, it is zero
• Probability of a Type I Error
• 1 – level of significance = level of
confidence

8 The McGraw-Hill Series


9 Managerial Economics

Performing a t-Test
b̂
• t -ratio is computed as t 
Sb̂
where Sb̂ is the standard error of the estimate bˆ

• Use t-table to choose critical t-value


with n – k degrees of freedom for the
chosen level of significance
• n = number of observations
• k = number of parameters estimated
9 The McGraw-Hill Series
10 Managerial Economics

Performing a t-Test
• If absolute value of t-ratio is greater
than the critical t, the parameter
estimate is statistically significant

10 The McGraw-Hill Series


11 Managerial Economics

Using p-Values
• Treat as statistically significant
only those parameter estimates
with p-values smaller than the
maximum acceptable significance
level
• p-value gives exact level of
significance
• Also the probability of finding
significance when none exists
11 The McGraw-Hill Series
12 Managerial Economics

Coefficient of Determination
• R2 measures the percentage of total
variation in the dependent variable
that is explained by the regression
equation
• Ranges from 0 to 1
• High R2 indicates Y and X are highly
correlated

12 The McGraw-Hill Series


13 Managerial Economics

F-Test
• Used to test for significance of
overall regression equation
• Compare F-statistic to critical F-
value from F-table
• Two degrees of freedom, n – k & k – 1
• Level of significance
• If F-statistic exceeds the critical F,
the regression equation overall is
statistically significant
13 The McGraw-Hill Series
14 Managerial Economics

Multiple Regression
• Uses more than one explanatory
variable
• Coefficient for each explanatory
variable measures the change in
the dependent variable associated
with a one-unit change in that
explanatory variable

14 The McGraw-Hill Series


15 Managerial Economics

Quadratic Regression Models


• Use when curve fitting scatter plot
is -shaped or -shaped
• Y  a  bX  cX 2

• For linear transformation compute


new variable Z  X 2
• Estimate Y  a  bX  cZ

15 The McGraw-Hill Series


16 Managerial Economics

Log-Linear Regression Models


• Use when relation takes the form: Y  aX b Z c
Percentage change in Y
• b 
Percentage change in X
Percentage change in Y
• c 
Percentage change in Z
• Transform by taking natural logarithms:
lnY  lna  b ln X  c ln Z
• b and c are elasticities
16 The McGraw-Hill Series

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