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4 (15 points) John is interested in understanding the determinants of housing prices in Hong Kong. He has collected data on all the apartments sold
4 (15 points) John is interested in understanding the determinants of housing prices in Hong Kong. He has collected data on all the apartments sold in 2023. The data contains the following variables: e price: transaction price in millions of HKD e sqft: size of the apartment in square feet e ycons: year of construction e age: age of the apartment e distMTR: distance to the nearest MTR station in meters He estimated the following models: In(price) = By + fisqft + u (a) (5 points) What are the potential problems with this model? How would you suggest John to improve his model? [Hint: Think about the potential omitted variable bias. Be specific about the direction of the bias| (b) (5 points) John believe that both the age of the apartment and its year of construction may be important determinants of the price. Should he include both variables in the model? Why or why not? (c) (5 points) Suppose that dist MTR is uncorrelated with sqft, do you think that dist M'T' R should be included in the model? Why or why not
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