Calculation

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

...