In: Statistics and Probability
To determine whether the cash bonuses paid by Johnson Financial Group are related to annual pay, data were gathered for 10 account executives who received such bonuses in 2007.
The data, scatterplot and summary statistics are shown below.
ANNUAL PAY | CASH BONUS |
$70,723 | $11,262 |
$58,612 | $6,313 |
$104,706 | $14,252 |
$44,025 | $4,235 |
$82,786 | $11,884 |
$116,342 | $23,731 |
$76,861 | $7,826 |
$68,639 | $20,818 |
$137,069 | $55,012 |
$94,524 | $34,426 |
1) Comment on whether each of the following conditions for
correlation / linear regression is met
- Quantitative Variables Condition
- Linearity Condition
- Outlier Condition
2) Estimate the linear regression model that relates the
response variable (Cash Bonus) to the predictor variable (Annual
Pay)
Find the slope of the regression line.
Find the intercept of the regression line.
Write the equation of the linear model.
3) Find the value of R2. Interpret its meaning in this context
4) Using the regression equation, estimate the cash bonus for an
executive at Johnson Financial earning $82,786 a year.
What is the residual for this estimate? What does it mean?
1. Checking for conditions with scatter plot
Conditions met: Quantitative Variables Condition and Linearity Condition
2. Using Excel, go to Data, select Data Analysis, choose Regression. Put Annual Pay in X input range and Cash Bonus in Y input range.
SUMMARY OUTPUT | |||||
Regression Statistics | |||||
Multiple R | 0.812 | ||||
R Square | 0.659 | ||||
Adjusted R Square | 0.616 | ||||
Standard Error | 9677.023 | ||||
Observations | 10 | ||||
ANOVA | |||||
df | SS | MS | F | Significance F | |
Regression | 1 | 1448230160.971 | 1448230160.971 | 15.465 | 0.004 |
Residual | 8 | 749158209.929 | 93644776.241 | ||
Total | 9 | 2197388370.900 | |||
Coefficients | Standard Error | t Stat | P-value | ||
Intercept | -19637.790 | 10284.742 | -1.909 | 0.093 | |
Annual pay | 0.452 | 0.115 | 3.933 | 0.004 |
Slope = 0.452
Intercept = -19637.79
y = -19637.79 + 0.452x
Cash bonus = -19637.79 + 0.452*Annual pay
3. R-square = 0.659
Thihs means that 65.9% variation in cash bonus is explained by annual pay.
4. Annual pay = $82,786
Estimated Cash bonus = -19637.79 + 0.452*82786 = $17,781.482
Actual cash bonus = $11,884
Residual = 11884-17781.482 = -5897.482
This means estimated value is $5897 more than actual value of cash bonus.