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Unformatted text preview: ECON 414 SOLUTION TO HOMEWORK 3 Spring 2011 2.6 (i) Yes. If living closer to an incinerator depresses housing prices, then being farther away increases housing prices. (ii) If the city chose to locate the incinerator in an area away from more expensive neighborhoods, then log( dist ) is positively correlated with housing quality. This would violate SLR.4, and OLS estimation is biased. (iii) Size of the house, number of bathrooms, size of the lot, age of the home, and quality of the neighborhood (including school quality), are just a handful of factors. As mentioned in part (ii), these could certainly be correlated with dist [and log( dist )]. 2.10 (i) This derivation is essentially done in equation (2.52), once (1/SST ) x is brought inside the summation (which is valid because SST x does not depend on i ). Then, just define /SST i i x w d = . (ii) Because 1 1 1 Cov( , ) E[( ) ] , u u =- we show that the latter is zero. But, from part (i), ( 29 1 1 1 1 E[( ) ] =E E( ).)....
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- Spring '11