Example 1

The Internal Revenue Service (IRS) is trying to estimate the

monthly amount of unpaid taxes discovered by its auditing
division. In the past, the IRS estimated this figure on the basis of
expected number of field-audit labor hours. In the recent years,
however, field-audit labor hours have become an erratic
predictor of the actual unpaid taxes. As a result, the IRS is
looking for another factor with which it can improve the
estimating equation. The auditing division does keep a record of
the number of hours its computers are used to detect unpaid
taxes.

Could we combine this information with the data on field-audit

labor hours and come up with a more accurate estimating
equation for the unpaid taxes discovered each month?
Table below presents these data for the last ten months.

Field-Audit Reward to Actual unpaid

labor-hours Computer Hours Informants taxes discovered
Month (in 00s) (in 00s) (in 000s) (in 000 000s)
Jan 45 16 71 29
Feb 42 14 70 24
Mar 44 15 72 27
Apr 45 13 71 25
May 43 13 75 26
Jun 46 14 74 28
Jul 44 16 76 30
Aug 45 16 69 28
Sep 44 15 74 28
Oct 43 15 73 27
Suppose the auditing division adds to its model the
information concerning rewards to informants because it
feels certain that there is some relationship between these
payments and the unpaid taxes discovered.

Develop appropriate regression models and critically analyze

the problem to draw some meaningful conclusions.
Example 2

Regression analysis can be used to model the relationship

between the selling price of a house and its total living area.
The table below contains the final selling prices and total
living areas for a sample of 30 houses in the same geographic
area that were sold during 1987.

Construct a scatter diagram for the data. Is there evidence to

suggest that it would be inappropriate to represent the
relationship between price and living area with a straight line?
Explain.
Area Price Area Price Area Price
1600 110900 1910 104000 2390 123300
1980 108700 1810 104500 2560 133000
2130 114500 2035 112000 2370 125000
1990 110300 3000 210000 2420 123300
1710 100900 2500 160000 2300 119200
2357 121100 2120 113600 2320 120000
2335 118700 1880 106500 2470 126800
2650 137200 1775 105000 2460 127100
2070 109300 1650 99000 3650 225100
1930 108400 2250 116100 2750 205600
Fit the following model to the data and interpret the results.

y = a + b1 x + b2 x + ε 2