Question

Are decisions in business based on models? Give an example

Answer 1

yes decisions are based on statistical models like regression analysis, moving average, exponential smoothing, ARIMA, etc.

consider a business scenario of predicting sales of lays company on basis of quantity of chips per packet, gender and income of customer. here regerssion equation is in the form of sales = b0 + b1*quantity + b2*gender + b3*income

here the coefficient of determination, R^2 tells me variation in sales which is explained by quantity of chips per packet, gender and income of customer. this percentage is expected to be greater than 70% for model to be a good fit to the data.

"b1" tells me the change in sales with a unit (1 gram) increase in quantity of chips per packet.

for females there is b2 units more sales of chips as compared to males. (for dummy variable gender, female=1 and male=0)

"b3" tells me the change in sales with a unit ($1000) increase in income of customer