Calculation
Essay by amykang • March 7, 2016 • Exam • 358 Words (2 Pages) • 1,069 Views
15.068 Crash Program
To estimate how being in an accident affects a car’s resale value in the used-car
market, a consultant obtained the following regression equation from actual sales data:
S = 10,400 - .06M + 338L + 214C - 722A
Where S= resale price of a certain type of car (year, make, model--YMM)
M = mileage driven
L = 1 if leather seats, 0 otherwise
C= 1 if compact-disc player, 0 otherwise
A = 1 if involved in an accident, 0 otherwise
(It is assumed that all cars in accidents have been repaired, and that the car is sold at age
five.)
Based on these results, he suggested that every owner of a car with this YMM
who has been in an accident receive $722 from his insurance company, as compensation
for the accident-related drop in resale value. Assuming that the insurance policy does
cover such “inherent diminished value,” is this a reasonable and fair proposal for
compensation?
Briefly discuss the strengths and weaknesses of this regression model for answering the question. Do you believe that the strengths outweigh the weaknesses, or vice-versa?
To estimate how being in an accident affects a car’s resale value in the used-car
market, a consultant obtained the following regression equation from actual sales data:
S = 10,400 - .06M + 338L + 214C - 722A
Where S= resale price of a certain type of car (year, make, model--YMM)
M = mileage driven
L = 1 if leather seats, 0 otherwise
C= 1 if compact-disc player, 0 otherwise
A = 1 if involved in an accident, 0 otherwise
(It is assumed that all cars in accidents have been repaired, and that the car is sold at age
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