A Realtor Wants to Predict and Compare the Prices of Homes

question 128

Short Answer

A realtor wants to predict and compare the prices of homes in three neighboring locations. She considers the following linear models:
Model A: Price = β₀ + β₁ Size + β₂ Age + ε
Model B: Price = β₀ + β₁ Size + β₃ Loc1 + β₄ Loc2 + ε
Model C: Price = β₀ + β₁ Size + β₂ Age + β₃ Loc1 + β₄ Loc2 + ε
where,
Price = the price of a home (in $1,000s)
Size = the square footage (in sq. feet)
Loc1 = a dummy variable taking on 1 for Location 1, and 0 otherwise
Loc2 = a dummy variable taking on 1 for Location 2, and 0 otherwise
After collecting data on 52 sales and applying regression, her findings were summarized in the following table. Note: The values of relevant test statistics are shown in parentheses below the estimated coefficients.
Using Model B, compute the predicted price of a 2,500-square-foot home in Location 1.

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Definitions:

CPI

The Consumer Price Index, a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, used to assess price changes in the cost of living.

Price Level

A measure of the average prices of goods and services in an economy at a specific time, influencing purchasing power and economic policy.

Nominal Rate

The interest rate as stated without adjusting for inflation, representing the face value of financial transactions.

Interest

The cost of borrowing money or the return on investment; it is typically expressed as a percentage of the principal amount.