# 101hw4 - Department of Agricultural and Resource Economics...

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Department of Agricultural and Resource Economics EEP101/ECON125 University of California, Berkeley David Zilberman Solutions to Problem set 4 1. Hedonic prices, see Chapter 9, pp6-8. We hypothesize that house price depends on the three housing characteristics in the following way: House price = n + n1*(view) + n2*(indoor space) + n3*(outdoor space), thus we can write a system of four equations: 300000 = n + n1*0 + n2*1000 + n3*2000 500000 = n + n1*0 + n2*1500 + n3*7000 360000 = n + n1*1 + n2*1800 + n3*2000 600000 = n + n1*1 + n2*1200 + n3*5000 Solve and yield n = 380000, n1 = 220000, n2 = -200, n3 = 60. (a) The implicit value of indoor space is \$-200/square feet, the implicit price of outdoor space is \$60/square feet, and the implicit price of having a view is \$220,000. (b) The projected price of a house with indoor space of 1000sf and outdoor space of 1,500sf and without view is \$270,000, and the projected price of such house with a view is \$490,000, thus the gain from a view is \$220,000. (c) (Chapter 9, p4) WTP is the maximum amount of money an individual would give up in exchange for the benefits of the environmental amenity. It can be measured by the area under the individual’s demand curve, which is bounded by the individual’s budget. WTA is the minimum total amount of money an individual would accept to forego all the benefits associated with the environmental amenity. WTA is not bounded by the individual’s budget constraint, therefore is generally greater than WTP. (d) (Chapter 9, pp9-11) Contingent valuation is a technique that allows the estimation of the value people attach to a environmental amenity by directly asking their WTP or their WTA a compensation. CV has been widely used in estimating non-market value, however, like many other interviewing techniques, it has its own weaknesses. Such

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## This note was uploaded on 08/01/2008 for the course ECON 101 taught by Professor Wood during the Spring '07 term at University of California, Berkeley.

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101hw4 - Department of Agricultural and Resource Economics...

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