Time limit: Tomorrow(18 September 2020) 3 PM IST.

Instructions for the formal individual assignment:

with appropriate and succinct justification for each. Please show and explain workings

wherever necessary. 1 mark for each question.

The Toyco

The Toyco1

is an American toy company based in New Jersey. The toy production company is

notable for producing toys based on famous cartoon characters. Some of these toys went on to

become most popular toys among children across the globe.

A toys industry analyst, fascinated by The Toyco for its success rate of manufacturing such

popular toys, wants to estimate the gross earnings generated by a toy manufactured by the toy

company. The estimate will be based on different variables involved in the toy’s production.

The independent variables considered are X1 (COST) = production cost of manufacturing the

toy and X2 (ADVT) = total costs of all advertising and promotional activities. A third variable

that the analyst wants to consider is the qualitative variable of whether or not the toy is based

on a new cartoon character already made famous before the launch of the toy. This third,

qualitative variable is handled by the use of an indicator variable: X3 (TOON) = 1 if the toy is

based on a famous cartoon character, and 0 otherwise. The analyst obtains information on a

random sample of 20 toys manufactured and produced within the last five years (the inference

is to be made only about the population of toys in this particular category). The data are given

in Table 1. The variable Y (EARN) is gross earnings, in millions of dollars. The two

quantitative independent variables are also in millions of dollars.

The file [login to view URL] contains data observations for the following variables:

EARN – gross earnings of Toyco (in millions of dollars)

COST – manufacturing/production cost of the toy (in millions of dollars)

ADVT – total costs of all advertising and promotional activities (in millions of dollars)

TOON – binary variable depending on whether the toy is based on a famous cartoon

character or otherwise

TABLE 1. Data on Earnings

The regression model can be presented as:

Predicted EARNings = a + b1COST + b2ADVT + b3TOON + error term

Questions:

1. Prepare the regression model based on this data. How useful is the model overall?

2. Are all three independent variables relevant in the model? Justify.

3. What gross earnings does the model predict for a toy costing nothing to manufacture or

advertise, and that is not based on a cartoon character? Explain how meaningful is this

figure?

4. Explain the meaning of the estimate b1 = 2.85

5. Can you reject the hypothesis that the underlying value of b1 = 1?

6. What would this hypothesis imply?

7. Compare the estimated gross earnings of a toy costing \$6m, with advertising cost of \$3m

based on a famous cartoon character, to that of a toy with identical costs, but not based on

a cartoon character. Explain the meaning of b3.

8. A cartoon character franchisees’ alliance claims that the existence of a cartoon character

increases gross earnings of a toy on average by \$10m. Can you reject this hypothesis?

9. Are there any high correlations (significantly greater than 0) among the explanatory

variables that might cause estimation problems (i.e. any multicollinearity problems)?

10. Does the DW statistic indicate anything?

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