HW 8

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Eastern Illinois University *

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5500

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Economics

Date

Jan 9, 2024

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docx

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HW 8: 1. First, I will run regression by predicting adjusted Oil price using US Population and World Oil Consumption and storing residuals as a new variable named “AdjPrice”. Then similarly, I will run regression by predicting US Oil consumption using US Population and World Oil Consumption and store the residuals as a variable named “AdjCons”: Now, I will run regression using the two new variables, Adjusted Price and Adjusted Consumption (which were derived after controlling for US Population and World Oil Consumption) and control for time t and t sqaured: If we look at the coefficient of t squared, it is positive 0.0746, indicating a convex relationship. On the basis of the regression equation, we can say that price initially decreased and then it started increasing as time progressed. Up to some point it was actually concave (during the Iran crisis) and then the relationship became convex and price continued to increase.
Removing multicollinearity effect Because t and t squared are essentially the same variable, inclusion of both has created multicollinearity in the model which can be seen from the high VIF of 57.73 and 58.58. In order to remove the multicollinearity effect, we will have to do mean centered approach. For doing this, we will calculate Mu of the t variable. Now we will run regression between Adjusted Price and Adjusted Consumption controlling for the Mu t and squaring the Mu t: Now we can see that VIF for Mu t and Mu t*Mu t are both now below 10. So, we have successfully removed the multicollinearity effect from the model using the centered mean approach. If t and t squared can be in the model Looking at the p value from the analysis of variance table, we can see both t and t squared are insignificant. However, we should not exclude t and t squared from the model even though p value came out insignificant, because though insignificant, both t and t squared are part of the model and are controlled variable and hence model will not be complete without controlling for t and t squared.
2. Model building: Using Minitab using the Ford data: Response is HwyMPG Vars R-Sq R-Sq (adj) R-Sq (pred) Mallows Cp S W e i g h t H o r s e p o w e r C y l i n d e r s D i s p l a c e m e n t M a n T r a n s G e a r s F W D 1 78.9 78.4 75.8 23.0 2.2294 X 1 74.6 74.0 71.7 35.7 2.4418 X 2 85.2 84.5 82.2 5.9 1.8890 X X 2 83.8 83.1 80.5 9.9 1.9730 X X 3 86.7 85.8 83.2 3.1 1.8076 X X X 3 85.5 84.5 82.0 6.8 1.8896 X X X 4 87.5 86.3 83.5 2.8 1.7769 X X X X 4 86.8 85.5 82.7 4.8 1.8235 X X X X 5 87.7 86.2 83.1 4.1 1.7832 X X X X X 5 87.6 86.0 82.5 4.6 1.7949 X X X X X 6 87.8 85.8 82.2 6.0 1.8037 X X X X X X 6 87.7 85.8 82.4 6.1 1.8056 X X X X X X 7 87.8 85.5 81.8 8.0 1.8279 X X X X X X X Adjusted R squared: Here, on the basis of the adjusted R squared value, we can see that highest adjusted R-squared value is 86.3 and if we select that model then the best subset model will have independent variables of weight, horsepower, cylinder and displacement. Mallows Cp: On the basis of Mallows Cp, Best MALO cp is the one closest to P (Number of IV+Slope). From the list of Mallows Cp values, we can see that 4.8 is the best Mallows Cp in terms of being closest to P (in this case 5) . If we use this model, it is using the following four variables to predict the highway mileage of the car: Weight, Horsepower, Cylinder, and FWD. So, combining both, we now have two models as the best predictors of highway mileage. We may now use these two models to further test our hypothesis and decide the fittest between the two. Step-wise regression using SPSS:
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