Regression Analysis

ECON 705 Estimating Costs

1. Download the data file Estimating Cost Data. Assume this data represents total variable costs of production across 39 different weeks producing different levels of output.

2. Use TVC and Q to calculate AVC.

3. Use Microsoft Excels Regression tool to estimate an average variable cost function of the form AVC=a+bQ+cQ2. Be sure to note which variable is the dependent variable. If only Q is provided, make sure you create an additional column and calculate Q2. REMINDER: the independent variables should be located in adjacent columns so you can easily highlight the data as you enter it in the Regression dialog box. Based on the results:

a. Is the regression model statistically significant?

b. Write the estimated regression equation.

c. Are the coefficients statistically significant?

d. How large is the coefficient of determination (r2)?

e. How large is s?

f. How can the estimated AVC equation be converted to an estimated TVC equation?

g. If the current fixed cost of capital is $5,000, what is the TC equation?

4. Now consider an average variable cost function of the form AVC=a+bQ. Use Microsoft Excels Regression tool to estimate the equation. Based on the results:

a. Write the estimated regression equation.

b. Is the estimated slope coefficient statistically significant?

c. How large is the coefficient of determination (r2)?

d. How large is s?

e. Based on the results, which model provides a better fit?