10 May WHAT DO YOU CONCLUDE ABOUT THE IMPORTANCE OF FUNCTIONAL FORM?
Use the data in HPRICE3.RAW, only for the year 1981, to answer the following questions. The data are for houses that sold during 1981 in North Andover, MA; 1981 was the year construction began on a local garbage incinerator.
(i) To study the effects of the incinerator location on housing price, consider the simple regression model where price is housing price in dollars and dist. is distance from the house to the incinerator measured in feet. Interpreting this equation causally, what sign do you expect for ß1 if the presence of the incinerator depresses housing prices? Estimate this equation and interpret the results.
(ii) To the simple regression model in part (i), add the variables log(inset), log(area), log(land), rooms, baths, and age, where inset is distance from the home to the interstate, area is square footage of the house, land is the lot size in square feet, rooms is total number of rooms, baths is number of bathrooms, and age is age of the house in years. Now what do you conclude about the effects of the incinerator? Explain why (i) and
(ii) give conflicting results.
(iii) Add [log(inset)]2 to the model from part (ii). Now what happens? What do you conclude about the importance of functional form?
(iv) Is the square of log(dist.) significant when you add it to the model from part (iii)?
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