High-low method, regression analysis. Anna Martinez, the financial manager at the Casa Real restaurant is checking to see if there is any relationship between newspaper advertising and sales revenues at the restaurant She obtains the following data for the past 10 months:

She estimates the following regression equation:

Monthly revenues = $39,502 + ($8.723) × Advertising costs)

1. Plot the relationship between advertising costs and revenues.

2. Draw the regression line and evaluate it using the criteria of economic plausibility, goodness of fit, and slope of the regression line.

3. Use the high-low method to compute the function, relating advertising costs and revenues.

4. Using (a) the regression equation and (b) the high-low equation, what is the increase in revenues for each $1,000 spent on advertising within the relevant range? Which method should Martinez use to predict the effect of advertising costs on revenues? Explain briefly.

Transcribed Image Text:

Advertising Costs Month Revenues March $50,000 $2,000 April May 70,000 3,000 55,000 1,500 June 65,000 3,500 1,000 July August 55,000 65,000 2,000 September October 45,000 1,500 80,000 4,000 November 55,000 2,500 December 60,000 2,500