BSE3703: Let’s Assume a Hedonic Price Model for Housing in Pinkland Prices are a Function of the Square Meters of the Land: Econometrics for Business I Assignment, NUS, Singapore

Basic Econometrics

Individual Assignment

This is an individual assignment where you must work alone.  You must submit an electronic copy of your assignment in Canvas in pdf, doc, or Docx format.  Hard copies will not be accepted. Show your calculations (if any) as well as answering the questions in clear full sentences.  Log referrers to natural logarithm!

Question 1

Let’s assume a hedonic price model for housing in Pinkland. Prices are a function of the square meters of the land on which the house stands, the number of rooms, and NOX emissions. Prices are expressed in pinkies (the currency of Parkland). The model is estimated as follows:

Log(price) = 12.09 +  0.6 * log (sqm_land) +  0.28 * rooms – 0.09 * log (NOX)

N=800

R2 = 0.3

1. Interpret the intercept

2. Interpret the coefficient on the square meter variable.

3. Assume a NOX level of 4 and a land area of 500 square meters. How much is the price of the house going to increase if we extend it from 2 to 3 rooms?

4. Calculate the degrees of freedom associated with these estimates. Is this high enough for standard normal critical values to be applied?

Don’t forget: Log referrers to natural logarithm!

QUESTION  2

We model energy use as follows:

Lntpes_pc =

The variables are defined as follows:

Lntpes_pc = log of total primary energy consumption per capita (ktoe)
Lnypcpenn =log of GDP per capita (USD)
Lnypcpenn2 = square of the log of GDP per capita (USD)
Ln_gasprice = log of pump price for gasoline (USD/liter)
LnAnnualprecip= log of annual precipitation (mm)
Temp_coldest = average temperature for the coldest month in a year (in C)
Temp_warmest= average temperature for the warmest month in a year (in C)
ffrents = Fossil Fuel Rents (% of GDP)
LnPop = log of population (in millions)
LnLand = log of land area (in km2)
I_Incomegroup = refers to income groups “1”, “2” and “3”, low, mid, and high-income countries.

*” Log” always refers to natural logs or “ln” here.

1. Interpret the constant and its p-value.

2. Interpret the coefficient on gas price and carry out a t-test to determine the significance of the coefficient.

3. Interpret the coefficient on annual precipitation and its p-value.

4. Interpret the coefficient on land size and its p-value.

5. Interpret the R-squared.

6. The above model belongs to the class of nonlinear equations. Calculate the turning point of the nonlinear relationship.

7. Is this a U-shaped or inverted U-shaped relationship?

8. Describe when is it better to use nonlinear models than linear models, and what types of relationships are best modeled with this. Apart from quadratic models, what type of nonlinear models do you know? Describe with a few sentences.

9. Please describe if MLR 4 is likely to hold or not?

10. Please describe if MLR 5 is likely to hold or not?