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? is the intercept of the regression line, and ? is the slope of the regression line. e is the random disturbance term.
The way to interpret the above equation is as follows:
Y = ? + ?X (ignoring the disturbance term “e”)
gives the average relationship between the values of Y and X.
For example, let Y be the cost of goods sold and X be the sales. If ? = 2 and ? = 0.75, and if the sales are 100, i.e., X = 100, the cost of goods sold would be, on average,
2 + 0.75(100) = 77. However, in any particular year when sales X = 100, the actual cost of goods sold can deviate randomly around 77. This deviation from the average is called the “disturbance” or the “error” and is represented by “e”...
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