Question

Problem 1.

You are conducting a study on the price of houses in Los Angeles county, and studied data from n= 25 houses. Let the following variables denote your observations:

y^ = price of a house in thousands of dollars

x1= square footage

x2= distance in miles to nearest grocery store

x3 = a dummy variable that equals 1 if the house is in the top 50 state-

ranked school district and 0 otherwise.

x4= a dummy variable that equals 1 if the house is in Beverly Hills or Malibu

and 0 otherwise.

A) What do you predict would be the sign of each coefficient (bi) in the regression line? Briefly explain each.

B) Suppose b1=. 17 interpret the coefficient.

C) Suppose b4= 244.32. Interpret the coefficient

D) Suppose you run a restricted regression using x1, x2, and x4 yields R2 =

857. Furthermore, suppose the complete regression using x1, x2, x3 and x4 yields R2 = .772.

Which model do you think is better to use? Why?

E) Interpret R2 and R2 of the complete regression?

F) Why might the interaction term x1*x4 be useful to include in your

regression?

Thanks for your time