You have been assigned the task of projecting the cost of 2011 employee fringe benefits for your firm and have identified number of employees, total labor hours, and total labor cost as candidate independent variables for use in the estimation equation. Using historical data and ordinary least squares regression, you calculate the coefficient of determination for each of the candidate variables. You get the following results:
Coefficient of
Variable Determination
Number of employees ..... 0.87
Total labor hours ....... 0.95
Total labor cost ....... 0.81
a. Discuss how you would use the coefficient of determination to select the best predictor variable.
b. What are the highest and lowest possible values for the coefficient of determination? Explain.