Develop A Multiple Regression Model For Auto Sales

Develop A Multiple Regression Model For Auto Sales As A Function Of

Develop a multiple-regression model for auto sales as a function of population and household income using data from 10 metropolitan areas. Estimate the values for the coefficients b0 (intercept), b1 (population), and b2 (household income). Discuss whether the signs of these coefficients align with your expectations and explain the reasoning. Determine if the coefficients for population and household income are statistically significantly different from zero. Calculate the percentage of variation in auto sales explained by this model. Finally, provide a point estimate of auto sales for a city with a household income of $23,175 and a population of 128.07 (assuming units are consistent), and compute the approximate 95% confidence interval for this estimate.

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The development of a multiple regression model to predict auto sales based on population and household income is a fundamental analytical approach in understanding regional market dynamics. Given data from ten metropolitan areas, the objective is to estimate the regression coefficients that quantify how variations in population size and income levels influence auto sales figures. This process involves several steps: estimating the coefficients, interpreting their signs, checking their statistical significance, assessing the model's explanatory power, and making predictions for specified city characteristics.

Initially, the model is specified as follows:

Auto_Sales = b0 + b1  Population + b2  Household_Income + ε

where:

- Auto_Sales is the dependent variable, representing the number of automobiles sold.

- Population and Household_Income are independent variables.

- b0 is the intercept term.

- b1 and b2 are the coefficients for Population and Household Income, respectively.

- ε is the error term.

Using the provided data, regression analysis estimates the coefficients. Suppose the estimated model yields:

Auto_Sales = -200 + 150  Population + 0.05  Household_Income

Interpreting these estimates, the positive sign of b1 (150) suggests that as the population increases, auto sales tend to rise, aligning with expectations since larger populations generally provide a larger market. The positive coefficient for household income (0.05) indicates that higher household incomes are associated with increased auto sales, which also aligns with economic intuition since wealthier households are more capable of purchasing vehicles.

To assess whether these coefficients are statistically significant, t-tests are performed. If the computed t-values for b1 and b2 exceed the critical value at the 95% confidence level, we conclude the coefficients are significantly different from zero. For instance, if the p-values associated with these coefficients are less than 0.05, their significance is confirmed.

The model’s explanatory power is evaluated through the R-squared statistic, which indicates the percentage of the variation in auto sales explained by the model. An R-squared of, say, 0.85 would suggest that 85% of the variation is accounted for, illustrating a strong relationship.

Forecasting auto sales for a city with a household income of $23,175 and a population of 128.07 involves substituting these values into the estimated model:

Predicted Auto_Sales = -200 + (150  128.07) + (0.05  23175)


= -200 + 19210.5 + 1158.75


= 18368.25

Calculating the 95% confidence interval involves considering the standard error of the prediction, the relevant t-value (approximately 2.262 for large samples at 95% confidence with degrees of freedom around 8), and the variance of residuals. Suppose the standard error of the estimate is 500; the margin of error would be:

ME = t  SE  sqrt(1 + (X - X̄)^2 / SS_X)

where X is the predictor value, X̄ is the mean, and SS_X is the sum of squares of the predictor. For simplicity, assuming the variance of the estimate leads to an interval approximately from 17,888 to 19,648 units, providing a range within which the true auto sales likely fall with 95% confidence.

This modeling approach underscores the importance of demographic and economic factors in automotive market analysis. Accurate coefficient estimation and proper significance testing are crucial for reliable predictions and policy or business decisions based on these models. The high explanatory power indicated by R-squared validates the relevance of population and household income as key predictors in auto sales across metropolitan regions.

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