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256 Chapter 6 Linear Regression with Multiple Regressors

c. Juanita is a 28-year-old female college graduate from the South. Jennifer
is a 28-year-old female college graduate from the Midwest. Calculate
the expected difference in earnings between Juanita and Jennifer.

6.5 Data were collected from a random sample of 200 home sales from a com-
munity in 2013. Let Price denote the selling price (in $1000), BDR denote
the number of bedrooms, Bath denote the number of bathrooms, Hsize
denote the size of the house (in square feet), Lsize denote the lot size (in
square feet), Age denote the age of the house (in years), and Poor denote
a binary variable that is equal to 1 if the condition of the house is reported
as “poor.” An estimated regression yields

Price = 109.7 + 0.567BDR + 26.9Bath + 0.239Hsize + 0.005Lsize
+ 0.1Age - 56.9Poor, R2 = 0.85, SER = 45.8.

a. Suppose a homeowner converts part of an existing family room in
their house into a new bathroom. What is the expected increase in the
value of the house?

b. Suppose that a homeowner adds a new bathroom to their house,
which increases the size of the house by 80 square feet. What is the
expected increase in the value of the house?

c. What is the loss in value if a homeowner lets their house run down,
such that its condition becomes “poor?”

d. Compute the R2 for the regression.

6.6 A researcher plans to study the causal effect of a strong legal system on
the economy, using data from a sample of countries. The researcher plans
to regress national income per capita on whether the country has a strong
legal system or not (an indicator variable taking the value 1 or 0, based on
expert opinion).

a. Do you think this regression suffers from omitted variable bias?
Which variables would you add to the regression?

b. Assess whether the regression will likely over- or underestimate the
effect of police on the crime rate, based on the variables you think are
omitted. (That is, do you think that bn 7 b or bn 6 b?)

6.7 Critique each of the following proposed research plans. Your critique
should explain any problems with the proposed research and describe how
the research plan might be improved. Include a discussion of any additional