Some states permit only licensed firms to sell funeral goods (e.g., caskets, urns) to the consumer, while other states have no restrictions. States with casket sales restrictions are being challenged in court to lift these monopolistic restrictions. A paper in the Journal of Law and Economics (Feb. 2008) used multiple regression to investigate the impact of lifting casket sales restrictions on the cost of a funeral. Data collected for a sample of 1,437 funerals were used to fit the model. A simpler version of the model estimated by the researchers is E(y) = β0 + β1x1 + β2x2 + β3x1x2, where y is the price (in dollars) of a direct burial, x1 = {1 if funeral home is in a restricted state, 0 if not}, and x2 = { 1 if price includes a basic wooden casket, 0 if no casket). The estimated equation (with standard errors in parentheses) is:
y = 1,432 + 793x1, - 252x2 + 261x1x2, R2 = .78
(70) (134) (109)
a. Calculate the predicted price of a direct burial with a basic wooden casket at a funeral home in a restricted state.
b. The data include a direct burial funeral with a basic wooden casket at a funeral home in a restricted state that costs $2,200. Assuming the standard deviation of the model is $50, is this data value an outlier?
c. The data also include a direct burial funeral with a basic wooden casket at a funeral home in a restricted state that costs $2,500. Again, assume that the standard deviation of the model is $50. Is this data value an outlier?