Question

​​​​​​Illustrate the concept of residuals using your scatterplot from Problem 2.

Below is the data and scatterplot from problem 2:

FIRM	1	2	3	4	5	6
R&S (Millions, $), x	219	129	162	13	57	16
Sales (Millions, $), y	5790	4300	9980	201	1904	794

Scatterplot for R&D Expenditures and Sales for Six Health Care Firms 12000 10000 8000 Sales (Millions, $), y 6000 4000 2000 50 200 250 100 150 R&D (Millions, $),x

Explain your answer.

Answer 1

Sol:
From scatterplot we observe there exists a strong positive correlation between R&D and Sales.

As R&D expenditure increases,sales increases and viceversa.

In excel go to data>Data analysis >Regression

Enable

residuals and residual plot

A5 12 Input Input Y Range: ок 57 162 9980| 5B54:5B5101 201 1904 Cancel Input X Range: SAS4:SA$10 Help (Millions, S), 1 219 129 5790 4300 ; (Millions, $), Sales (Milons, S), y 2191 5790 129 4300 162 9980 131 1904 Labels Confidence Level: Constant is Zero 95 % 12000 2011 10000 576 Output options O Output Range: New Worksheet Ply: O New Workbook --794 8000 Dasidual 6000 Residuals standardized Residuais Residual Plots une Fit Plots 4000 2000 Normal Probability Normal Probability Plots

R&S (Millions, $), x Residual Plot 5000 Residuals OTT 050 100 150 200 250 -5000 R&S Millions, $), x

From residual plot we observe no pattern.

constant variance assumption is satisfied.