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It is desired to relate E(y) to a quantitative variable x1and 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 asEy=β0+β1x1+β2x2+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+β1x1+β2x2+β3x3

Where x1is 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: Manipulating rates of return with stock splits. Some firms have been accused of using stock splits to manipulate their stock prices before being acquired by another firm. An article in Financial Management (Winter 2008) investigated the impact of stock splits on long-run stock performance for acquiring firms. A simplified version of the model fit by the researchers follows:

E(y)=β0+β1x1+β2x2+β3x1x2

where

y = Firm’s 3-year buy-and-hold return rate (%)

x1 = {1 if stock split prior to acquisition, 0 if not}

x2 = {1 if firm’s discretionary accrual is high, 0 if discretionary accrual is low}

a. In terms of the β’s in the model, what is the mean buy and- hold return rate (BAR) for a firm with no stock split and a high discretionary accrual (DA)?

b. In terms of the β’s in the model, what is the mean BAR for a firm with no stock split and a low DA?

c. For firms with no stock split, find the difference between the mean BAR for firms with high and low DA. (Hint: Use your answers to parts a and b.)

d. Repeat part c for firms with a stock split.

e. Note that the differences, parts c and d, are not the same. Explain why this illustrates the notion of interaction between x1 and x2.

f. A test for H0: β3 = 0 yielded a p-value of 0.027. Using α = .05, interpret this result.

g. The researchers reported that the estimated values of both β2 and β3 are negative. Consequently, they conclude that “high-DA acquirers perform worse compared with low-DA acquirers. Moreover, the underperformance is even greater if high-DA acquirers have a stock split before acquisition.” Do you agree?

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d. The p-value of the subset F-test for comparing the two models for successful cabin crews was reported in the article as p 6 .05. Formally test the null hypothesis using α = .05. What do you conclude?

e. The two models were also fit to the data for the n = 24 unsuccessful cabin crews with the following results: R2 = .14 for reduced model, R2 = .15 for complete model. On the basis of this information only, give your opinion regarding the null hypothesis for unsuccessful cabin crews.

f. The p-value of the subset F-test for comparing the two models for unsuccessful cabin crews was reported in the article as p < .10. Formally test the null hypothesis using α = .05. What do you conclude?

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  1. Construct a scatterplot for these data.
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  3. Fit a first-order model to these data.
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Question: Tipping behaviour in restaurants. Can food servers increase their tips by complimenting the customers they are waiting on? To answer this question, researchers collected data on the customer tipping behaviour for a sample of 348 dining parties and reported their findings in the Journal of Applied Social Psychology (Vol. 40, 2010). Tip size (y, measured as a percentage of the total food bill) was modelled as a function of size of the dining party(x1)and whether or not the server complimented the customers’ choice of menu items (x2). One theory states that the effect of the size of the dining party on tip size is independent of whether or not the server compliments the customers’ menu choices. A second theory hypothesizes that the effect of size of the dining party on tip size is greater when the server compliments the customers’ menu choices as opposed to when the server refrains from complimenting menu choices.

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