Econometrics Problem. Please provide answesr and explanation. Using data from 19

Question

Econometrics Problem. Please provide answesr and explanation.

Using data from 1988 for houses sold in Andover, Massachusetts, from Kiel and McClain (1995), the following equation relates housing price (price) to the distance from a recently built garbage incinerator (dist): Interpret the coefficient on log(dist). Is the sign of this estimate what you expect it to be? Do you think simple regression provides an unbiased estimator of the ceteris paribus elasticity of price with respect to dist? (Think about the city's decision on where to put the incinerator.) What other factors about a house affect its price? Might these be correlated with distance from the incinerator?

Explanation / Answer

(i) If the house is much closer to an incinerator, the prices will be lower. If the house is much farther away from an incinerator, the prices will be higher. Yes. The housing prices and the distance from a recently built garbage incinerator are correlated positively.

(ii) If the city chose to put the incinerator close to the expensive neighborhoods, then log(dist) is negatively correlated with housing prices. This means and log(dist) are related, and it violates SLR. So that OLS estimation is biased.

(iii) Size of the house, number of bathrooms, size of the lot, age of the home, environment and quality of the neighborhood (including school quality), are just a handful of factors. As mentioned in part (b), these could certainly be correlated with dist [and log(dist)].

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