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It is desired to relate E(y) to a quantitative variable x1 and a qualitative variable at three levels.

  1. Write a first-order model.
  2. Write a model that will graph as three different second- order curves—one for each level of the qualitative variable.

Short Answer

Expert verified
  1. A first-order model equation in one quantitative variable and one qualitative variable with 3 levels can be written as E(y)=β0+β1xx+β2xx+β3x3.
  2. Graph

Step by step solution

01

First-order model

A first-order model equation in one quantitative variable and one qualitative variable with 3 levels can be written asE(y)=β0+β1xx+β2xx+β3x3,

Where x1 is the quantitative variable

And x2 and x­3 represent level 1 and level 2 of the qualitative variable.

02

Graph

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Most popular questions from this chapter

Question: Company donations to charity. The amount a company donates to a charitable organization is often restricted by financial inflexibility at the firm. One measure of financial inflexibility is the ratio of restricted assets to total firm assets. A study published in the Journal of Management Accounting Research (Vol. 27, 2015) investigated the link between donation amount and this ratio. Data were collected on donations to 115,333 charities over a recent 10-year period, resulting in a sample of 419,225 firm-years. The researchers fit the quadratic model,E(y)=β0+β1x+β2x2, where y = natural logarithm of total donations to charity by a firm in a year and x = ratio of restricted assets to the firm’s total assets in the previous year. [Note: This model is a simplified version of the actual model fit by the researchers.]

  1. The researchers’ theory is that as a firm’s restricted assets increase, donations will initially increase. However, there is a point at which donations will not only diminish, but also decline as restricted assets increase. How should the researchers use the model to test this theory?
  2. The results of the multiple regression are shown in the table below. Use this information to test the researchers’ theory at. What do you conclude?

Question:If the analysis of variance F-test leads to the conclusion that at least one of the model parameters is nonzero, can you conclude that the model is the best predictor for the dependent variable ? Can you conclude that all of the terms in the model are important for predicting ? What is the appropriate conclusion?

Suppose the mean value E(y) of a response y is related to the quantitative independent variables x1and x2

E(y)=2+x1-3x2-x1x2

a) Identify and interpret the slope forx2

b) Plot the linear relationship between E(y) andx2for role="math" localid="1649796003444" x1=0,1,2, whererole="math" localid="1649796025582" 1x23

c) How would you interpret the estimated slopes?

d) Use the lines you plotted in part b to determine the changes in E(y) for eachrole="math" localid="1649796051071" x1=0,1,2.

e) Use your graph from part b to determine how much E(y) changes whenrole="math" localid="1649796075921" 3x15androle="math" localid="1649796084395" 1x23.

Buy-side vs. sell-side analysts’ earnings forecasts. Refer to the Financial Analysts Journal (July/August 2008) comparison of earnings forecasts of buy-side and sell-side analysts, Exercise 2.86 (p. 112). The Harvard Business School professors used regression to model the relative optimism (y) of the analysts’ 3-month horizon forecasts. One of the independent variables used to model forecast optimism was the dummy variable x = {1 if the analyst worked for a buy-side firm, 0 if the analyst worked for a sell-side firm}.

a) Write the equation of the model for E(y) as a function of type of firm.

b) Interpret the value ofβ0in the model, part a.

c) The professors write that the value ofβ1in the model, part a, “represents the mean difference in relative forecast optimism between buy-side and sell-side analysts.” Do you agree?

d) The professors also argue that “if buy-side analysts make less optimistic forecasts than their sell-side counterparts, the [estimated value ofβ1] will be negative.” Do you agree?

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