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    Dilbert's Forecast of High Health Care Bills

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    It is 2007 and you are a newly minted MBA. Your employer sends you on a reconnaissance mission to Roswell, New Mexico. Your CEO wants to relocate the firm's customer service operation to Roswell, but she is at odds with Dilbert, the recently appointed Director of Human Resources department. Dilbert says that the residents of Roswell have had a freakishly high rate of brain tumors, and insists that the rate will rise in the near future, making a relocation to Roswell an expensive mistake (as a result of higher-than-average health care bills for the firm's Roswell employees). Dilbert attributes the high rate of brain tumors in Roswell to the 1997 crash of a mysterious flying vehicle carrying a cargo of kranium. Adhering to company policy, you don't ask, and he doesn't tell, whether he believes in UFOs.

    Your assignment is to confirm or disconfirm Dilbert's forecast of high health care bills in the near future. From your friends at Google.com, you find out that (1) kranium is a radioactive substance with a half-life of one year (meaning that each year, the radiation it emits is halved), and (2) it does indeed cause brain tumors, with the risk of brain tumors moving in line with the level of kranium radiation being emitted. From the Roswell hospital, you obtain the following data on the annual number of residents diagnosed with brain tumors during the 1997-2006 period:
    1997 1039
    1998 474
    1999 275
    2000 149
    2001 92
    2002 77
    2003 4
    2004 15
    2005 22
    2006 2
    Using the hospital's data, you estimate the following model:

    ln (TUMORS) = 7.5 - 0.627 YEAR Adj-R2 = 0.86
    t = 13.6 t = -7.1

    where TUMORS = Number of brain tumor diagnoses in a given year
    YEAR = 1 (for 1997) to 10 (for 2006)

    Using a brand new Etch-a-Sketch, Dilbert estimates the following model, using the very same data:

    TUMORS = 1174 - 328.7 YEAR + 22.0 YEAR 2 Adj-R2=0.89
    t = 9.1 t = -6.1 t = 4.6

    How many tumors does your model predict for the year 2007? __________

    How many tumors does Dilbert's model predict for 2007? __________

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    Solution Summary

    Help to confirm or disconfirm Dilbert's forecast of high health care bills in the near future is presented.