Chapter 14.6, Problem 37E

In exercise 13, data were given on the adjusted gross income x and the amount of itemized deductions taken by taxpayers. Data were reported in thousands of dollars. With the estimated regression equation ŷ = 4.68 + .16x, the point estimate of a reasonable level of total itemized deductions for a taxpayer with an adjusted gross income of $52,500 is $13,080.

1. a. Develop a 95% confidence interval for the mean amount of total itemized deductions for all taxpayers with an adjusted gross income of $52,500.
2. b. Develop a 95% prediction interval estimate for the amount of total itemized deductions for a particular taxpayer with an adjusted gross income of $52,500.
3. c. If the particular taxpayer referred to in part (b) claimed total itemized deductions of $20,400, would the IRS agent’s request for an audit appear to be justified?
4. d. Use your answer to part (b) to give the IRS agent a guideline as to the amount of total itemized deductions a taxpayer with an adjusted gross income of $52,500 should claim before an audit is recommended.