Question

Using the package “wooldridge’, and the data ‘hprice1’ (in R-Software) to estimate the model price = β0 + β1sqrft + β2bdrms + u , where is the house price measured in thousands of dollars.

1. Write out the results in equation form.

2.  What is the estimated increase in price for a house with one more bedroom, holding square footage constant?

3. What is the estimated increase in price for a house with an additional bedroom that is 140 square feet in size? Compare this to your answer in part 2

Answer 1

1)

price ^ = −19.31 + 0.13 sqrf t + 15.20bdrms

2)

One more bedroom is estimated to increase the sales price by $15,200

3)

Adding a bedroom without increasing the size of the house at all results in an increase in price of $15,200. Doing so essentially means that you would be adding a bedroom (which takes up some number of square feet) and subtracting that number of square feet from elsewhere in the house (so that you gained a bedroom without adding any square feet). If we now add a bedroom and 140 square feet to a house, we increase its predicted sales price by 0.13 × 140 + 15.20 × 1 = 33.4, or $33,400