Question

11. The following equation relates housing price (price) to the distance from a recently built garbage incinerator (dist):

log(^price) = 9.40+0.312log(dist)3

(a) Interpret the coefficient on log(dist). Is the sign of this estimate what you expect it to be?

(b) Do you think simple regression provides an unbiased estimator of the ceteris paribus elasticity of price with respect to dist?

(c) What other factors about a house affect its price? Might these be cor- related with distance from the incinerator?

Answer 1

a. This is a log log model and so this will mean that the slope coefficient in this model gives the elasticity of house prices with respect to the distance from the incinerator. The sign of the coefficient is as expected as the greater the distance from the garbage incinerator the greater the price of the house should be. The coefficient shows how much prices of houses with change due to a unit change in the distance from the garbage incinerator. This is the elasticity. The coefficient is positive as expected. The father away from the garbage incinerator the higher the price.

b. Simple regression would not work here as the relation between the distance and the price of the house is not linear. In such a case CLRM will not work and maybe a quadratic model maybe considered. Also how far away the incinerator is put will not be linearly related to price anyway. So we will not get unbiased estimates here.

c. The location of the house near hospitals, schools and offices will also drive up its price. Such amenties will probably be located far away from the garbage incinerator, themselves and so the correlation will be high with the distance from the garbage incinerator.