Using the data from 1988 for houses sold in Andover, MA, from keil and McClain (

Question

Using the data from 1988 for houses sold in Andover, MA, from keil and McClain (1995) the following equation equates housing price (price), to the distance to a a recently build garbage incinerator (dist):

n=135, R2=.162

(a) interpere the coefficient of log(dist). Is the sign of this estimate what you expected it to be?

(b)Do you think a simple regression provides an unbias estimator of centeris paribus easticity of price with respect to dist?

(c) What other factors about houses might affect its price? Might these be correlated with distance from the incinerator?

Explanation / Answer

Solution:

(a) 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.

(b) I don' t think so. Because 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.4, so that OLS estimation is biased.

(c) Size, environment, age, and locations of the houses, quality of the neighborhood. and so on. Just like the (b), some of these factors may also be correlated with distance from the incinerator.

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