A jewelry firm wants to submit a bid to purchase a large collection of diamonds but is uncertain how much it should bid. You will use the results from a predictive model to make a recommendation on how much the jewelry company should bid for the diamonds.
A diamond distributor has recently decided to exit the market and has put up a collection of 1,000 diamonds up for auction. Seeing this as a great opportunity to expand its inventory, a jewelry firm is interested in making a bid. To determine how much to bid, the firm’s analytics department will use a large database of diamond prices to build a linear regression model to predict the price of a diamond based on its attributes.
As the business analyst, you are tasked to build the linear regression model and apply that model to make a recommendation for how much the company should bid for the entire collection of 1,000 diamonds. (CLOs 1,5,7,8,10,11)
To complete this assignment, you will be submitting a file in Word using a report format to provide the answers to the following questions across five steps.
Step 1 – Research and Reflect:
- There have been numerous debates, articles, and even a movie (Blood Diamond) about the mining and international sales of “conflict diamonds.” Research and present (in no less than 500 words) the nature of the conflict diamond trade and the relevance of Peter Drucker’s ideas to today’s multinational enterprises regarding their participation in the trade.
Step 2 – Understanding the Model:
There are two datasets.
- diamonds12.xlsx contains the data used to build the regression model. diamonds12.xlsx
- new_diamondsa.xlsxcontains the data for the diamonds the company would like to purchase. new-diamondsa.xlsx
Both datasets contain carat, cut, and clarity data for each diamond. Only the diamonds12.xlsx dataset has prices.
- Carat represents the weight of the diamond and is a numerical variable.
- Cut represents the quality of the cut of the diamond and falls into 5 categories: fair, good, very good, ideal, and premium. Each of these categories is represented by a number, 1-5, in Cut_Ord
- Clarity represents the internal purity of the diamond and falls into 8 categories: I1, SI2, SI1, VS1, VS2, VVS2, VVS1, and IF. Each of these categories is represented by a number, 1-8, in Clarity_Ord
Using Excel, build the linear regression model using the diamonds12.xlsx dataset.
- Based on the Summary Output produced by the regression analysis write out the linear regression model and explain why you are confident (or not confident) in the model to predict the price. NOTE: Copy and paste a copy of the summary output into your report.
- According to the linear model, if a diamond is 1 carat heavier than another with the same cut and clarity, how much more would the retail price of the heavier diamond be? Why?
- If you were interested in a 1.5 carat diamond with a Very Good cut (represented by a 3 in the model) and a VS2 clarity rating (represented by a 5 in the model), what retail price would the model predict for the diamond?
Step 3 – Calculate the predicted price for each diamond: Using the new_diamondsa.xlsx dataset, for each diamond, plug in the values for each of the variables into the linear model (equation), then solve the equation to get the estimated, or predicted diamond price.
Step 4 – Visualize the Data: Create two scatter diagrams (or scatter plot).
- Plot 1 – Plot the data for the diamonds in the database, with carat on the x-axis and price on the y-axis.
- Plot 2 – Plot the data for the diamonds for which you are predicting prices with carat on the x-axis and predicted price on the y-axis.
- Note: If you know how you can also plot both sets of data on the same chart in different colors.
- What strikes you about this comparison?
- After seeing this plot, do you feel confident in the model’s ability to predict prices? Why or why not?
Step 5 – Make the Recommendation: Now that you have the predicted price for each diamond, it’s time to calculate the bid price for the whole set. Note: The diamond price that the model predicts represents the final retail price the consumer will pay. The company generally purchases diamonds from distributors at 70% of that price, so your recommended bid price should represent that. What bid do you recommend for the jewelry company? Please explain how you arrived at that number. (CLOs 1,5,7,8,10,11)
- Most classes have a 2 paper requirement per course. Please be sure to address the following requirements when completing your papers:
- The cover page and reference page/s are not included in the page requirement or word count. These should be in addition to page requirements.
- Papers need to be formatted in proper APA 6th Edition style.
- Each paper requires a minimum of at least three outside peer-reviewed sources for your references.
- Acceptable/credible sources include: Academic journals and books, industry journals, and the class textbook. You could use credible business website sources in addition to the peer-reviewed required sources, but avoid Wikipedia and Google. These are academic papers that need to include scholarly research.
- Using your textbook is required as well to demonstrate that you have read the required material.