A Simple Linear Regression, Sales = β₀ + β₁ Advertising

question 96

Essay

A simple linear regression, Sales = β₀ + β₁ Advertising + ε, is estimated using cross-sectional data from 10 firms. The resulting residuals e, along with the values of the explanatory variable Advertising (x, in $100s), are shown in the accompanying table. a. Graph the residuals e against Advertising (x) and look for any discernible pattern.
B) Which assumption is being violated? Discuss its consequences and suggest a possible remedy.

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Definitions:

Minimum Efficient Scale

The smallest level of production at which a firm can achieve the lowest long-run average total cost.

Economic Costs

The total cost of choosing one action over another, comprising both the costs directly incurred and the opportunity costs forgone by not taking the alternative action.

Total Revenue

The total amount of money received by a company from its sales of goods or services before any expenses are subtracted.

Assistant's Salary

The compensation paid to an assistant, which typically includes wages or salaries for clerical, support, or administrative roles.