# ECON2206 Assignment 1 Session 2014

Assignment 1 To investigate the effects of the land size (lotsize)and house size (sqrft) on the house price (price) in a particular suburb, the following model is used. (a) What is the meaning of ????1in this model? (b) Explain why you would (or would not) expect that ????1 > 0. (c) Explain the meaning of the zero-conditional-mean assumption for this model. from the course website and read the descriptions about the data. Find the (i) the units of measurement; (ii) the sample means; and (iii) the sample standard deviations of price , lotsize , sqrft and bdrms. (e) With the data in âhprice1.rawâ, estimate the above model by OLS and report the results in equation form, including the sample size and ????2. Interpret the estimated coefficient on log (????????????????????). Would you say the coefficient is economically significant? Why? (f) Suppose that two houses (A and B) have exactly the same characteristics, except that house A has lotsize = 9000 and house B has lotsize = 9900. According to the results in (e), what is the expected percentage difference of the prices of the two houses? Approximation can be used. (g) Add the variable bdrms (as an explanatory variable) to the above model and estimate the extended model by OLS and report the results in equation form, including the sample size and ????2. Interpret the estimated coefficient on bdrms. Find the correlation between bdrms and log(????????????????????) (using the âcorâ command in STATA). Does the correlation agree with your expectations? (h) Suppose that the model in (g) is the true model that satisfies the Gauss-Markov assumptions MLR.1-5. Explain why the estimation results in (e) may not be desirable under this supposition. Comment on the differences in estimated coefficients on log (????????????????????????????) and log (????????????????????) in (e) and (g).