A Realtor Wants to Predict and Compare the Prices of Homes

question 94

Essay

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 C, define the null hypothesis for testing the joint significance of the two dummy variables.

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Definitions:

Positive Economics

A branch of economics that focuses on describing and explaining the economic world as it is, not as it should be.

Operation of Systems

The process of managing and executing the functions and activities of interconnected and interdependent components to achieve specified goals.

Economic Behavior

The study of how individuals, institutions, and societies make decisions under constraints of resources, including analysis of market and non-market behaviors.

Normative Statement

An opinion-based statement that reflects beliefs about what is good or desirable and prescribes or recommends specific policies.