The following equation describes the median housing price in a community in terms of
amount of pollution (noxfor nitrous oxide) and the average number of rooms in houses in
the community (rooms):
(i) What are the probable signs ofb1andb2? What is the interpretation ofb1? Explain.
(ii) Why mightnox[or more precisely, log(nox)] androomsbe negatively correlated? If
this is the case, does the simple regression of log(price) on log(nox) produce an upward or a downward biased estimator ofb1?
(iii) Using the data in HPRICE2.RAW, the following equations were estimated:
Is the relationship between the simple and multiple regression estimates of the
elasticity ofpricewith respect tonoxwhat you would have predicted, given your answer in part? (ii) Does this mean that2.718 is definitely closer to the true elasticity