Reading 12: Multiple Regression and Issues in Regression A

products, children, games, white, style

Q46. Milky Way, Inc. is a large manufacturer of children’s toys and games based in the United States. Their products have high name brand recognition, and have been sold in retail outlets throughout the United States for nearly fifty years. The founding management team was bought out by a group of investors five years ago. The new management team, led by Russell Stepp, decided that Milky Way should try to expand its sales into the Western European market, which had never been tapped by the former owners. Under Stepp’s leadership, additional personnel are hired in the Research and Development department, and a new marketing plan specific to the European market is implemented. Being a new player in the European market, Stepp knows that it will take several years for Milky Way to establish its brand name in the marketplace, and is willing to make the expenditures now in exchange for increased future profitability.

Now, five years after entering the European market, Stepp is reviewing the results of his plan. Sales in Europe have slowly but steadily increased over since Milky Way’s entrance into the market, but profitability seems to have leveled out. Stepp decides to hire a consultant, Ann Hays, CFA, to review and evaluate their European strategy. One of Hays’ first tasks on the job is to perform a regression analysis on Milky Way’s European sales. She is seeking to determine whether the additional expenditures on research and development and marketing for the European market should be continued in the future.

Hays begins by establishing a relationship between the European sales of Milky Way (in millions of dollars) and the two independent variables, the number of dollars (in millions) spent on research and development (R&D) and marketing (MKTG). Based upon five years of monthly data, Hays constructs the following estimated regression equation:

Estimated Sales = 54.82 + 5.97 (MKTG) + 1.45 (R&D)

Additionally, Hays calculates the following regression estimates:

Coefficient

Standard Error

Intercept

54.82

3.165

MKTG

5.97

1.825

R&D

1.45

0.987

Hays begins the analysis by determining if both of the independent variables are statistically significant. To test whether a coefficient is statistically significant means to test whether it is statistically significantly different from:

A) zero.

B) the upper tail critical value.

C) slope coefficient.

Q47. The t-statistic for the marketing variable is calculated to be:

A) 17.321.

B) 3.271.

C) 1.886.

Q48. Hays formulates a test structure where the decision rule is to reject the null hypothesis if the calculated test statistic is either larger than the upper tail critical value or lower than the lower tail critical value. At a 5% significance level with 57 degrees of freedom, assume that the two-tailed critical t-values are t_c = ±2.004. Based on this information, Hays makes the following conclusions:

§ Point 1: The intercept term is statistically significant.

§ Point 2: Both independent variables contribute to explaining states for Milky Way, Inc.

§ Point 3: If an F-test were being used, the null hypothesis would be rejected.

Which of Hays’ conclusions are CORRECT?

A) Points 1 and 3.

B) Points 1 and 2.

C) Points 2 and 3.

Q49. Hays is aware that part, but not all, of the total variation in expected sales can be explained by the regression equation. Which of the following statements correctly reflects this relationship?

A) MSE = RSS + SSE.

B) SST = RSS + SSE + MSE.

C) SST = RSS + SSE.