Answer Set 5 - Fall 2008

Answer Set 5 - Fall 2008 - Econ 371 Problem Set #5 Answer...

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Econ 371 Problem Set #5 Answer Sheet 8.2 This question focuses on the hedonic regression model results in Table 8.2. a. The first part of this question asks you to predict the change in the price of a home from building a 500-square addition to the house. According to the regression results in column (1), the house price is expected to increase by 21% (= 100% × 0 . 00042 × 500), assuming all other factors are held constant. The 95% confidence interval for the percentage change is 100% × 500 × (0 . 00042 ± 1 . 96 × 0 . 000038) or [17.276% to 24.724%]. b. Because the regressions in columns (1) and (2) have the same dependent variable, ¯ R 2 can be used to compare the fit of these two regressions. The log-log regression in column (2) has the higher so it is better so use ln(Size) to explain house prices. c. With the addition of a swimming pool, the house price is expected to increase by 7.1% (= 100% × 0 . 071 × 1). The 95% confidence interval for this effect is 100% × (0 . 071 ± 1 . 96 × 0 . 034) or [0.436% to 13.764%]. d. The addition of a single bedroom is expected to increase the price of a house by 0.36% (= 100% × 0 . 0036 × 1). However, the effect is not statistically significant at a 5% significance level (with a corresponding t-statistic of only t act = 0 . 0036 0 . 037 = 0 . 097 < 1 . 96). Note that this coefficient measures the effect of an additional bedroom holding the size of the house constant. e. The quadratic term ln ( Size ) 2 is not statistically significant at a 5% significance level (with a correspond- ing t-statistic in column (4) of only t act = 0 . 0078 0 . 14 = 0 . 056 < 1 . 96). f. The expected change in the price when a pool is added to a house with a view is 7.1% (= 100% × 0 . 071 × 1) when a swimming pool is added to a house without a view and other factors are held constant. The house price is expected to increase by 7.32% (= 100% × (0 . 071 × 1 + 0 . 0022 × 1) when a swimming pool is added to a house with a view and other factors are held constant. The difference in the expected percentage change in price is 0.22%. The difference is not statistically significant at a 5% significance level (with a corresponding t-statistic of only t act = 0 . 0022 0 . 10 = 0 . 022 < 1 . 96) 8.4 This question focuses on the returns to education. a. In this first part of the question, you are asked to predict the impact of an additional year of experience on the logarithm of average hourly earnings ( AHE ) for a male with 16 years of education and 2 years of experience who is from a western state. Using the ideas from the Key Concept 8.1, we have that: Δ ln ( AHE ) = £ 1 . 215 + 0 . 0899(0) - 0 . 521(0) + 0 . 0207(0)(16) + 0 . 0232(3) - 0 . 000368(3 2 ) - 0 . 058(0) - 0 . 078(0) - 0 . 030(1)] - £ 1 . 215 + 0 . 0899(0) - 0 . 521(0) + 0 . 0207(0)(16) + 0 . 0232(2) - 0 . 000368(2 2 ) - 0 . 058(0) - 0 . 078(0) - 0 . 030(1)] = 2 . 60 - 2 . 578 = 0 . 022 ( or 2.2%) b. Repeating this exercise for someone with 10 years of experience, we get that: Δ ln ( AHE ) = £ 1 . 215 + 0 . 0899(0) - 0 . 521(0) + 0 . 0207(0)(16) + 0 . 0232(11) - 0 . 000368(11 2 ) - 0 . 058(0) - 0 . 078(0) - 0 . 030(1)] - £ 1 . 215 + 0 . 0899(0) - 0 . 521(0) + 0 . 0207(0)(16) + 0 . 0232(10) - 0 . 000368(10 2 ) - 0 . 058(0) - 0 . 078(0) - 0 . 030(1)] = 2 . 744 - 2 . 729 = 0 . 015 ( or 1.5%) c. The results in (a) and (b) are different because the model is nonlinear, including a quadratic expression in experience.
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This note was uploaded on 08/09/2009 for the course ECON 120B taught by Professor Jeon during the Spring '08 term at UCSD.

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Answer Set 5 - Fall 2008 - Econ 371 Problem Set #5 Answer...

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