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In: Economics

Consider a researcher who is trying to analyze the relationship between house price, Pricei , and...

Consider a researcher who is trying to analyze the relationship between house price, Pricei , and the size of the house Sizei . Using survey data, the researcher wants to estimate the following model: Pricei = β1 + β2Sizei + ui . In this specific case, why does the disturbance term exist? Please give 2 reasons with explanations.

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Expert Solution

Researcher trying to analyze the relationship between house price and size pf the house size.

Pricei = β1 + β2Sizei + ui

The above equation tells us the relationship between the house price and size of the house. There is one another variable which feature in the equation i.e., distrubance term (ui).

The disturbance term exist in the equation, because there are other factor apart from the size of the house which affect the price of house. So, this disturbance term capture the impact of other factors on the price of house.

The disturbance term also helps in capture the random outside influence on the price of house (dependent variable) which we cannot model.

Rahul Sunny answered 2 years ago
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