Interpreting regression results, matching time periods, ethics Jayne Barbour is working as a summer intern at Mode, a trendy store specializing in clothing for twenty-some-things. Jayne has been working closely with her cousin, Gail Hubbard, who plans promotions for Mode. The store has only been in business for 10 months, and Valerie Parker, the store’s owner, has been unsure of the effectiveness of the store’s advertising. Wanting to impress Valerie with the regression analysis skills she acquired in a cost accounting course the previous semester, Jayne decides to prepare an analysis of the effect of advertising on revenues. She collects the following data:

Jayne performs a regression analysis, comparing each month’s advertising expense with that month’s revenue, and obtains the following formula:

Required
1. Plot the preceding data on a graph and draw the regression line. What does the cost formula indicate about the relationship between monthly advertising expense and monthly revenues? Is the relationship economically plausible?
2. Jayne worries that if she makes her presentation to the owner as planned, it will reflect poorly on her cousin Gail’s performance. Is she ethically obligated to make the presentation?
3. Jayne thinks further about her analysis, and discovers a significant flaw in her approach. She realizes that advertising done in a given month should be expected to influence the following month’s sales, not necessarily the current month’s. She modifies her analysis by comparing, for example, October advertising expense with November sales revenue. The modified regression yields the following:

What does the revised cost formula indicate? Plot the revised data on a graph. (You will need to discard October revenue and July advertising expense from the data set.) Is this relationship economically plausible?
4. Can Jayne conclude that there is a cause and effect relationship between advertising expense and sales revenue? Why or whynot?
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November 14, 2011

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