Question

2. In “Hedonic Housing Prices and the Demand for Clean Air,” David Harrison Jr. and Daniel Rubinfeld1 estimated households’ willingness to pay for clean air in the Boston metropolitan area. They then see how the willingness to pay depends on pollution levels and income by estimating the following model:?????????????????=?1+?2∗????+?3∗???????+??Where:: is the estimated marginal willingness to pay (in $) of a household in the ?????????????????census tract for slightly cleaner air in the census tract : nitrogen oxide level (pollution) of the census tract in parts per hundred million (pphm)????: median household income of the census tract in hundreds of dollars???????Their estimated model results are reported as:?1=―1040?2=209?3=12.1?2=0.52??????????=506Please use these results to answer the following questions:

a. How much would households be willing to pay or receive for a 1 pphm reduction in nitrogen oxide levels, holding income constant? (6 points)

b. Please interpret the ?^2 of this regression. (6 points)

c. Suppose a census tract had a median household income level of $12,500 and nitrogen oxide levels of 10 pphm. What would be the regression’s prediction for the household’s willingness to pay? (6 points)

d. The authors also estimate the following model: ?????????????????=?1+?2∗????+?3∗???????+?4∗????+?? Where: ???They obtain the following regression results from the new model:?1=―581?2=189?3=12.4?4=―119.8?2=0.55??????????=506 In terms of the regression’s model fit to the data on willingness to pay, which model would the authors prefer? Please report the statistics that you used to make this determination. (12 points)

Answer 1