Consider the following estimated regression equation: Price i = 109.24 + 54.99 N

Question

Consider the following estimated regression equation:

Pricei = 109.24 + 54.99 Newi – 20.44 Scratchi + 0.73 Bidrsi

P - Values =           (0.000)               (0.001)         (0:455)

where:

Pricei = the price at which the ith iPod sold on eBay

Newi = a dummy variable equal to 1 if the ith iPod was new, 0 otherwise

Scratchi = a dummy variable equal to 1 if the ith iPod had a minor cosmetic defect,

0 otherwise

Bidrsi = the number of bidders on the ith iPod

If you could add one variable to this equation, what would it be? Explain (Hint: All the iPods in the sample are silver-colored, 4 GB Apple iPod minies.)

Explanation / Answer

From the equation, it seems that the number of bidders on the ith iPod is not a statistically significant factor in determining the price of the iPod in eBay. However, the usage and the appearance matter to the buyers. One variable that could be added to the equation is whether the iPod comes with pre-loaded songs in it. The buyers would not have to go through the trouble of adding songs to the iPod if they are pre-loaded with songs of different genres and tastes before purchase. A dummy variable which takes a value 1 if the iPods are pre-loaded with songs and 0 otherwise.

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