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11. Simple Linear Regression Learning Objectives Describe the Linear Regression Model State the Regression Modeling Steps Explain Ordinary Least Squares Compute Regression Coefficients Predict Response Variable Interpret Computer Output Models Representation of Some Phenomenon Mathematical Model Is a Mathematical Expression of Some Phenomenon Often Describe Relationships between Variables Types Deterministic Models Probabilistic Models Deterministic Models 1. Hypothesize Exact Relationships 2. Suitable When Prediction Error is Negligible Example: Force Is Exactly Mass Times Acceleration F = m·a Probabilistic Models Hypothesize 2 Components Deterministic Random Error Y = Deterministic component + Random Error where Y is the variable of interest. Example: Sales Volume Is 10 Times Advertising Spending + Random Error Y = 10X + ( Random Error May Be Due to Factors Other Than Advertising Types of Probabilistic Models A First-Order (Straight-Line) Probabilistic Model where y is the dependent (or response) variable, is the independent (or predictor) variable, is the deterministic portion of the model, is y-intercept of the line, and is slope of the line. Regression Models 1. Answer ‘What Is the Relationship Between the Variables?’ 2. Equation Used 1 Numerical Dependent (Response) Variable What Is to Be Predicted 1 or More Numerical or Categorical Independent (Explanatory) Variables 3. Used Mainly for Prediction Estimation Regression Modeling Steps 1. Hypothesize Deterministic Component 2. Estimate Unknown Model Parameters Specify Probability Distribution of Random Error Term Estimate Standard Deviation of Error 4. Evaluate Model 5. Use Model for Prediction Estimation Sample Linear Regression Model Origins of Regression: “Regression Analysis was first developed by Sir Francis Galton in the latter part of the 19th Century. Galton had studied the relation