The dataset below captures total costs (in $mm) of

investor-owned electrical utilities with more than $1

million in annual revenues in 1955 (Nerlove, 1963).
Assuming that costs depend on the price of labor,
capital and raw materials (specifically, fuel), run the
appropriate multiple linear regression using the data
below and answer the following questions.

a. What is the R2 of the regression?

b. Interpret the R2.
c. Which independent variable(s) have a linear
relationship with total cost, in this model?
d.
Is there a linear relationship between total
cost and the independent variables? What
are the test statistic and the p-value of this
test?
e.
Assuming a wage rate of $2.00, a capital
price index of $200, and a weighted average
fuel price of $25, what is your prediction for
total cost?

firm capital price

id total cost wage rate index fuel price
1 0.082 2.09 183 17.9
2 0.661 2.05 174 35.1
3 0.990 2.05 171 35.1
4 0.315 1.83 166 32.2
5 0.197 2.12 233 28.6
6 0.098 2.12 195 28.6
7 0.949 1.98 206 35.5
8 0.675 2.05 150 35.1
9 0.525 2.19 155 29.1
10 0.501 1.72 188 15.0
11 1.194 2.09 170 17.9
12 0.670 1.68 167 39.7
13 0.349 1.81 213 22.6
14 0.423 2.30 164 23.6
15 0.501 1.75 170 42.8
16 0.550 1.76 161 10.3
17 0.795 1.98 210 35.5
18 0.664 2.29 158 28.5
19 0.705 2.19 156 29.1
20 0.903 1.75 176 42.8
21 1.504 2.20 170 36.2
22 1.615 1.66 192 33.4
23 1.127 1.92 164 22.5
24 0.718 1.77 175 21.3
25 2.414 2.09 180 17.9
26 1.130 1.82 176 38.9
27 0.992 1.80 202 20.2
28 1.554 1.92 227 22.5
29 1.225 1.92 186 29.1
30 1.565 2.19 183 29.1
31 1.936 1.92 169 22.5
32 3.154 1.52 168 27.5
33 2.599 1.92 164 22.5
34 3.298 2.20 164 36.2
35 2.441 2.11 170 24.4
36 2.031 1.92 158 22.5
37 4.666 2.05 177 35.1
38 1.834 1.66 195 33.4
39 2.072 1.80 176 20.2
40 2.039 1.77 188 21.3
41 3.398 1.70 187 26.9
42 3.083 2.02 152 35.1
43 2.344 2.19 157 29.1
44 2.382 1.85 163 24.6
45 2.657 2.19 143 29.1
46 1.705 2.13 167 10.7
47 3.230 1.54 217 26.2
48 5.049 1.52 144 27.5
49 3.814 2.09 178 30.0
50 4.580 1.75 176 42.8
51 4.358 2.30 167 23.6
52 4.714 2.05 158 35.1
53 4.357 2.32 162 31.9
54 3.919 2.31 198 33.5
55 3.442 1.92 164 22.5
56 4.898 2.05 164 35.1
57 3.584 1.76 161 10.3
58 5.535 1.70 174 26.9
59 4.406 2.04 157 20.7
60 4.289 2.24 185 26.5
61 6.731 1.70 157 26.9
62 6.895 1.68 203 39.7
63 5.112 2.29 178 28.5
64 5.141 2.00 183 34.3
65 5.720 2.31 168 33.5
66 4.691 1.45 196 17.6
67 6.832 1.70 166 26.9
68 4.813 1.76 172 10.3
69 6.754 1.70 158 26.9
70 5.127 2.09 174 30.0
71 6.388 1.55 225 28.2
72 4.509 2.11 168 24.4
73 7.185 2.05 177 35.1
74 6.800 2.30 161 23.6
75 7.743 2.19 162 29.1
76 7.968 2.04 158 20.7
77 8.858 2.31 176 33.5
78 8.588 1.70 183 26.9
79 6.449 2.05 166 35.1
80 8.488 2.19 164 29.1
 81 8.877 2.00 207 34.3
82 10.274 2.32 175 31.9
83 6.024 1.55 225 28.2
84 8.258 2.13 178 30.0
85 13.376 2.20 157 36.2
86 10.690 2.20 138 36.2
87 8.308 1.85 163 24.6
88 6.082 1.76 168 10.3
89 9.284 1.80 158 20.2
90 10.879 2.32 177 31.9
91 8.477 1.80 170 20.2
92 6.877 2.13 183 10.7
93 15.106 1.98 162 35.5
94 8.031 1.76 177 10.3
95 8.082 1.45 196 17.6
96 10.866 2.24 164 26.5
97 8.596 1.69 158 12.9
98 8.673 1.81 157 22.6
99 15.437 2.11 163 24.4
100 8.211 1.76 161 10.3
101 11.982 1.77 156 21.3
102 16.674 2.00 217 34.3
103 12.620 2.30 161 23.6
104 12.905 2.04 183 20.7
105 11.615 1.69 167 12.9
106 9.321 1.76 161 10.3
107 12.962 2.04 163 20.7
108 16.932 2.20 170 36.2
109 9.648 1.76 174 10.3
110 18.350 2.31 197 33.5
111 17.333 1.92 162 22.5
112 12.015 1.76 155 10.3
113 11.320 1.76 167 10.3
114 22.337 2.31 176 33.5
115 19.035 2.30 170 23.6
116 12.205 1.61 183 17.8
117 17.078 1.68 190 28.8
118 25.528 2.09 170 30.0
119 24.021 2.09 176 30.0
120 32.197 2.05 159 35.1
121 26.652 2.29 157 28.5
122 20.164 2.11 161 24.4
123 14.132 1.53 172 18.1
124 21.410 2.11 203 24.4
125 23.244 2.04 167 20.7
126 29.845 2.19 195 29.1
127 32.318 1.92 161 29.1
128 21.988 2.04 159 20.7
129 35.229 2.11 177 24.4
130 17.467 1.76 157 10.3
131 22.828 1.79 196 18.5
132 33.154 2.11 183 24.4
133 32.228 1.54 189 26.2
134 34.168 1.92 160 22.5
135 40.594 2.12 162 28.6
136 33.354 1.61 178 17.8
137 64.542 2.32 199 31.9
138 41.238 2.24 182 26.5
139 47.993 2.31 190 33.5
140 69.878 2.11 165 24.4
141 44.894 1.68 203 28.8
142 67.120 2.24 151 26.5
143 73.050 2.12 148 28.6
144 139.422 2.31 212 33.5
145 119.939 2.30 162 23.6
firm id
identifier for investor-owned utilities with more than $1 million in annual revenues in 1955
total cost
firm total cost in millions of dollars
wage rate
statewide averages of wages of utility workers
capital price index
indexed measure of the cost of capital for electric power generation firms
fuel price

fuel is the most important material cost of power generation; therefore, the statewide average from
the firm's principal location, weighted by type of fuel (e.g., coal, oil, and gas) and BTU equivalent, is
used

Source: Nerlove, M. (1963). Returns to Scale in Electricity Supply. In C. F. Christ. (Ed.), Measurement
in Economics-Studies in Mathematical Economics and Econometrics in Memory of Yehuda Grunfeld.
Palo Alto, CA: Stanford University Press.
a.
What is the R2 of the regression? 0.072649528148427
b.
Only about 7.2% of the variability of "Total Cost" is explained by the
combination of "Wage rate," "capital price index" and "fuel price," suggesting
Interpret the R2. these three are not well-fit to explain "Total cost"
c.

"Wage rate" is the only independent variable which yields a p-value less than
Which independent variable(s) have a linear an assumed alpha=0.05 value, and thus, we come to the conclusion that "Wage
relationship with total cost, in this model? rate" is the only variable with linear relationship to "Total cost"
d.
Is there a linear relationship between total
cost and the independent variables? What
are the test statistic and the p-value of this
test? Only linear with "Wage rate", see part (c.)
linear relationship Yes
test statistic 3.28475998729207
p-value 0.001287634170729
e.
Assuming a wage rate of $2.00, a capital
price index of 200, and a weighted average
fuel price of $25, what is your prediction for
total cost? 16.2544426097512 ($mm)

firm capital price

id total cost wage rate index fuel price SUMMARY OUTPUT
1 0.082 2.09 183 17.9
2 0.661 2.05 174 35.1 Regression Statistics
3 0.990 2.05 171 35.1 Multiple R 0.2695357641
4 0.315 1.83 166 32.2 R Square 0.0726495281
5 0.197 2.12 233 28.6 Adjusted R Square 0.052918667
6 0.098 2.12 195 28.6 Standard Error 19.263706653
 7 0.949 1.98 206 35.5 Observations 145
8 0.675 2.05 150 35.1
9 0.525 2.19 155 29.1 ANOVA
10 0.501 1.72 188 15.0 df SS MS
11 1.194 2.09 170 17.9 Regression 3 4099.092566551 1366.3641889
12 0.670 1.68 167 39.7 Residual 141 52323.7455581 371.09039403
13 0.349 1.81 213 22.6 Total 144 56422.83812465
14 0.423 2.30 164 23.6
15 0.501 1.75 170 42.8 Coefficients Standard Error t Stat
16 0.550 1.76 161 10.3 Intercept -46.554675586 22.62752510227 -2.0574355956
17 0.795 1.98 210 35.5 wage rate 24.092517066 7.334635455711 3.2847599873
18 0.664 2.29 158 28.5 capital price index 0.0941884843 0.091298049492 1.0316593273
19 0.705 2.19 156 29.1 fuel price -0.1685445121 0.218718528303 -0.7706000647
20 0.903 1.75 176 42.8
21 1.504 2.20 170 36.2
22 1.615 1.66 192 33.4
23 1.127 1.92 164 22.5
24 0.718 1.77 175 21.3
25 2.414 2.09 180 17.9
26 1.130 1.82 176 38.9
27 0.992 1.80 202 20.2
28 1.554 1.92 227 22.5
29 1.225 1.92 186 29.1
30 1.565 2.19 183 29.1
31 1.936 1.92 169 22.5
32 3.154 1.52 168 27.5
33 2.599 1.92 164 22.5
34 3.298 2.20 164 36.2
35 2.441 2.11 170 24.4
36 2.031 1.92 158 22.5
37 4.666 2.05 177 35.1
38 1.834 1.66 195 33.4
39 2.072 1.80 176 20.2
40 2.039 1.77 188 21.3
41 3.398 1.70 187 26.9
42 3.083 2.02 152 35.1
43 2.344 2.19 157 29.1
44 2.382 1.85 163 24.6
45 2.657 2.19 143 29.1
46 1.705 2.13 167 10.7
47 3.230 1.54 217 26.2
48 5.049 1.52 144 27.5
49 3.814 2.09 178 30.0
50 4.580 1.75 176 42.8
51 4.358 2.30 167 23.6
52 4.714 2.05 158 35.1
53 4.357 2.32 162 31.9
54 3.919 2.31 198 33.5
55 3.442 1.92 164 22.5
56 4.898 2.05 164 35.1
57 3.584 1.76 161 10.3
58 5.535 1.70 174 26.9
59 4.406 2.04 157 20.7
60 4.289 2.24 185 26.5
61 6.731 1.70 157 26.9
62 6.895 1.68 203 39.7
63 5.112 2.29 178 28.5
64 5.141 2.00 183 34.3
65 5.720 2.31 168 33.5
66 4.691 1.45 196 17.6
67 6.832 1.70 166 26.9
68 4.813 1.76 172 10.3
69 6.754 1.70 158 26.9
70 5.127 2.09 174 30.0
71 6.388 1.55 225 28.2
72 4.509 2.11 168 24.4
73 7.185 2.05 177 35.1
74 6.800 2.30 161 23.6
75 7.743 2.19 162 29.1
76 7.968 2.04 158 20.7
 77 8.858 2.31 176 33.5
78 8.588 1.70 183 26.9
79 6.449 2.05 166 35.1
80 8.488 2.19 164 29.1
81 8.877 2.00 207 34.3
82 10.274 2.32 175 31.9
83 6.024 1.55 225 28.2
84 8.258 2.13 178 30.0
85 13.376 2.20 157 36.2
86 10.690 2.20 138 36.2
87 8.308 1.85 163 24.6
88 6.082 1.76 168 10.3
89 9.284 1.80 158 20.2
90 10.879 2.32 177 31.9
91 8.477 1.80 170 20.2
92 6.877 2.13 183 10.7
93 15.106 1.98 162 35.5
94 8.031 1.76 177 10.3
95 8.082 1.45 196 17.6
96 10.866 2.24 164 26.5
97 8.596 1.69 158 12.9
98 8.673 1.81 157 22.6
99 15.437 2.11 163 24.4
100 8.211 1.76 161 10.3
101 11.982 1.77 156 21.3
102 16.674 2.00 217 34.3
103 12.620 2.30 161 23.6
104 12.905 2.04 183 20.7
105 11.615 1.69 167 12.9
106 9.321 1.76 161 10.3
107 12.962 2.04 163 20.7
108 16.932 2.20 170 36.2
109 9.648 1.76 174 10.3
110 18.350 2.31 197 33.5
111 17.333 1.92 162 22.5
112 12.015 1.76 155 10.3
113 11.320 1.76 167 10.3
114 22.337 2.31 176 33.5
115 19.035 2.30 170 23.6
116 12.205 1.61 183 17.8
117 17.078 1.68 190 28.8
118 25.528 2.09 170 30.0
119 24.021 2.09 176 30.0
120 32.197 2.05 159 35.1
121 26.652 2.29 157 28.5
122 20.164 2.11 161 24.4
123 14.132 1.53 172 18.1
124 21.410 2.11 203 24.4
125 23.244 2.04 167 20.7
126 29.845 2.19 195 29.1
127 32.318 1.92 161 29.1
128 21.988 2.04 159 20.7
129 35.229 2.11 177 24.4
130 17.467 1.76 157 10.3
131 22.828 1.79 196 18.5
132 33.154 2.11 183 24.4
133 32.228 1.54 189 26.2
134 34.168 1.92 160 22.5
135 40.594 2.12 162 28.6
136 33.354 1.61 178 17.8
137 64.542 2.32 199 31.9
138 41.238 2.24 182 26.5
139 47.993 2.31 190 33.5
140 69.878 2.11 165 24.4
141 44.894 1.68 203 28.8
142 67.120 2.24 151 26.5
143 73.050 2.12 148 28.6
144 139.422 2.31 212 33.5
145 119.939 2.30 162 23.6
 F Significance F
3.6820252177 0.01363771054

P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

0.041486862 -91.28774247 -1.8216087013 -91.28774247 -1.8216087013
0.0012876342 9.59244527624 38.592588856 9.5924452762 38.592588856
0.3039980726 -0.0863015046 0.2746784732 -0.0863015046 0.2746784732
0.442233317 -0.6009360578 0.2638470337 -0.6009360578 0.2638470337