Practical Exercises – Multiple Regression Model

1) To explain what determines the price of air conditioners, one researcher obtained
the following regression results based on a sample of 19 air conditioners.

+ 19.729X3i + 7.653 X4i

se = (.005) (.8.992) (3.082)

R2 = 0.84
where
Y= the price, in dollars
X2= the energy rating of AC
X3= the energy efficiency ratio
X4= the number of settings
se= standard errors

a) Interpret the regression results

b) Do the results make economic sense?
c) At α =5%, test the hypothesis (using t test) that the energy rating has no effect on
the price of an AC vs. that it has a positive effect.
d) Would you accept the null hypothesis that the 3 explanatory variables together
explain a substantial variation in the prices of AC? Show clearly all your
calculations. [Hint: Use F test]

2. U.S. defense budget outlays, 1962-1981. In order to explain the US defense budget,
you are asked to consider the following model:

Where = defense budget-outlay for year t, $ billions

= GNP for year t, $ billion
= US military sales/assistance in year t, $ billions
= aerosapcae industry sales, $ billions

To test this model, you are given the data in the following Table.

Year Defense GNP, US military Aerospace Conflicts

 budget X2 sales/assistance, industry 100,000+,
outlays, Y X3 sales, X4 X5
1962 51.1 560.3 0.6 16.0 0
1963 52.3 590.5 0.9 16.4 0
1964 53.6 632.4 1.1 16.7 0
1965 49.6 684.9 1.4 17.0 1
1966 56.8 749.9 1.6 20.2 1
1967 70.1 793.9 1.0 23.4 1
1968 80.5 865.0 0.8 25.6 1
1969 81.2 931.4 1.5 24.6 1
1970 80.3 992.7 1.0 24.8 1
1971 77.7 1077.6 1.5 21.7 1
1972 78.3 1185.9 2.95 21.5 1
1973 74.5 1326.4 4.8 24.3 0
1974 77.8 1434.2 10.3 26.8 0
1975 85.6 1549.2 16.0 29.5 0
1976 89.4 1718.0 14.7 30.4 0
1977 97.5 1918.3 8.3 33.3 0
1978 105.2 2163.9 11.0 38.0 0
1979 117.7 2417.8 13.0 46.2 0
1980 135.9 2633.1 15.3 57.6 0
1981 162.1 2937.7 18.0 68.9 0

a. Estimate the parameters of this model and their standard errors and obtain ,
and .
b. Comment on the results, taking into account any prior expectations you have
about the relationship between Y and the various X variables.
c. What other variable(s) might you want to include in the model and why?

3. The demand for cable. The table gives data used by a telephone cable
manufacturer to predeict sales to a major customer for the period 1968-1983.
The variables in the table are defined as follows:

Y = annual sales in MPF, million paired feet

X2 = gross national product (GNP), $, billions
X3 = housing starts, thousand of units
X4 = unemployment rate, %
X5 = prime rate lagged 6 months
X6 = customer line gains, %

Year X2, GNP X3, housing X4, X5, prime X6, Y, total
 starts unemployment, rate lag, 6 customer plastic
% mos. line gains, purchases
% (MPF)
1968 1051.8 1503.6 3.6 5.8 5.9 5873
1969 1078.8 1486.7 3.5 6.7 4.5 7852
1970 1075.3 1434.8 5.0 8.4 4.2 8189
1971 1107.5 2035.6 6.0 6.2 4.2 7497
1972 1171.1 2360.8 5.6 5.4 4.9 8534
1973 1235.0 2043.9 4.9 5.9 5.0 8688
1974 1217.8 1331.9 5.6 9.4 4.1 7270
1975 1202.3 1160.0 8.5 9.4 3.4 5020
1976 1271.0 1535.0 7.7 7.2 4.2 6035
1977 1332.7 1961.8 7.0 6.6 4.5 7425
1978 1399.2 2009.3 6.0 7.6 3.9 9400
1979 1431.6 1721.9 6.0 10.6 4.4 9350
1980 1480.7 1298.0 7.2 14.9 3.9 6540
1981 1510.3 1100.0 7.6 16.6 3.1 7675
1982 1492.2 1039.0 9.2 17.5 0.6 7419
1983 1535.4 1200.0 8.8 16.0 1.5 7923

You are to consider the following model:

a. Estimate the preceding regression

b. What are the expected signs of the coefficients of this model?
c. Are the empirical results in accordance with prior expectations?
d. Are the estimated partial regression coefficients individually statistically
significant at the 5 percent level of significance?
e. Suppose you first regress Y on X2, X3 and X4 only then decide to add the variables
X5 and X6. How would you find out if it is worth adding the variables X5 and X6?
Which test do you use? Show the necessary calculations.
4) The following data set provides information about performance of public sector
in India. Run a multiple regression of output on other variables and interpret the
results.

Year Output Capital Raw Material Labour

1985 443.34 461.17 373.04 1214722
1986 379.05 536.1 259.88 1607128
1987 413.52 509.88 322.81 1545389
1988 466.2 677.5 380.49 1664926
1989 473.05 610.72 381.38 1593680
1990 544.1 598.71 424.61 1609015
1991 508.71 601.06 381.93 1626806
1992 468.36 585.62 347 1543411
1993 451.3 429.62 313.53 1568153
1994 413.1 527.87 260.36 1565944
1995 391.15 468.95 244.06 1530029
1996 445.07 451.34 296.75 1477010
1997 406.75 446.3 283.87 1468938
1998 388.31 446.51 239.24 1467611
1999 266.69 509.39 127.87 1434503
2000 307.4 488.33 153.8 1371988
Output = Nominal Output deflated by WPI (base 1981-82 = 100) Measured in Rupee crore
Capital = Capital employed deflated by WPI (base 1981-82 = 100), Measured in Rupee crore
Raw material = Raw material used is deflated by WPI (base 1981-82 = 100), Measured in
Rupee crore
Labour = Number of Labour employed