Question

5. [10 points] Kiel and McClain (1995) collected data on houses sold in Andover, Massa- chusetts during 1988. The following equation relates housing price to the distance from a garbage incinerator that was built in the late 1980s. log(price) 9.40 0.312 log (dist) n=135, R2= 0.162. (a) [4 points] Interpret the coefficient on log(dist). Is the sign of this estimate what you would expect it to be? affect the price? ceteris paribus elasticity of price with respect to dist? (c) [3 points] Do you think that this regression provides an unbiased estimator of the

Answer 1

a) this is a log-log model and coefficients in this model are elasticities.

When dist increases by 1% price of the house increases by 0.312%. the sign of the estimate is as expected because farther the distance from garbage incinerator, the higher is the demand for the house.

b) the other factors that affect the price of homes are- interest rate on loans, size of the house, distance from the market, economic growth, etc.

c) this regression will not provide unbiased estimator because many important variables like those mentioned above are not included in the model.