Suppose that an analyst for an insurance company is interested in using regression analysis to model the damage caused by hurricanes when they come ashore. The re sponse variable is Property Damage, measured in millions of dollars, and the explanatory variables are Diameter of Storm, Barometric Pressure, Wind Speed, and Time of Year.
a What subjective judgments, both explicit and implicit, must the analyst make in creating and using this model?
b If X1, Diameter of Storm, is measured in miles, what is the interpretation of the coefficient β1?
c Suppose the analyst decides to introduce a categorical variable X5, which equals 1 if the eye of the hurricane comes ashore near a large city (defined as a city with popula- tion ≥ 500,000) and 0 otherwise. How would you interpret β5?