Problem 1: “Predicting the impact of dwelling age on the price of a single-family home.”
Read the following article: “Age-Related Heteroskedasticity in Hedonic House Price Equations” by Allen C. Goodman and Thomas G. Thibodeau which appeared in an issue of Journal of Housing Research. A copy of the article is posted on Blackboard under the Assignments heading and midterm exam.
In class we discussed and it is also referenced in the article some of the economic theory behind the hedonic price equation of a single family home. Throughout the semester we have been using single family home selling price and home characteristics gathered by Zillow to estimate the sold price of a single family home. I have posted the dataset we have been using in class on Blackboard under the Assignments heading that lists single family sold prices along with a variety of housing characteristics for homes located in several New England communities. Your objective for this problem is to replicate the hedonic price equation for single family homes used by Goodman and Thibodeau using the posted data set.
(10 points)a. Briefly explain the importance of the five factors Goodman and Thibodeau list as characteristics of a home which determine its value. For each category, briefly discuss the theoretical signs associate with the impact of each factor on the dependent variable.
(10 points)b. In Equation 9, Goodman and Thibodeau use the natural log of Selling Price as the dependent variable. Why did they choose to use this variable as opposed to just Selling Price?
(10 Points)c. Explain the rationale for the Age-specific independent variables specified by Goodman and Thibodeau (Equation 9) in their attempt to estimate the effect of dwelling age on house price.
(5 points)d. Why did they include LIVAREA2 in Equation 9? What theoretical signs do they expect to find on LIVEAREA and LIVEAREA2?
(20 points)e. Use the dataset posted on Blackboard and define the variable AGE=2021-YearBuilt and LIVEAREA=SquareFootage. Next, use the specification for Equation 9 used by Goodman and Thibodeau to estimate the hedonic price equation. Why do you not have to worry about including their variable SOLD in your specification? Statistically test AND correct if necessary this specification for the following potential violations of OLS assumptions: omitted variables, functional form specification, multicollinearity, and heteroscedasticity.
(10 points)f. Based on your analysis in part e, use your estimate of equation 9 to obtain an estimate of the depreciation rate for a single family home. Be sure to interpret this estimate. Hint: Depreciation rate is defined as the percentage change in the homes Sold Price given an additional year of dwelling Age.
(5 points)g. Based on your analysis in part e, use your estimates of equation 9 to obtain an estimate of the optimal LIVEAREA size (in square feet) of a single family home. What does this estimate tell you about a home’s Selling Price?
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