East Meadow is a suburban New York community. A real-estate company gathers data on

appraised values of single-family houses (recorded in thousands of dollars) based on the age of

the house, whether or not it has a fireplace, and whether or not it has a finished basement. The

table below shows a regression model relating a house's value to the predictor variables

Bed (=number of bedrooms),

Bath (=number of bathrooms),

Age (=age of the house, in years),

Basement (=1 if basement is finished and =0 otherwise)

Regression results for customers' house values are given below. Notice that the results only show

the a partial regression table (i.e. there are no standard errors or p-values).

Summary Measures

R-squared 0.53

Adj R-Squared 0.49

Regression Coefficients

(Intercept) -18.20

Bed 6.60

Bath 36.40

Age -3.50

Basement 17.40

Age*Basement 1.50

Based on the regression table, what is the estimated value of a house with 2 bedrooms, 2

bathrooms, 10 years old and unfinished basement?

$86 thousand

$51 thousand

$47.8 thousand

$32.8 thousand

None of the above

Based on the regression table, provide an economic interpretation for the coefficient for "Bed".

For every additional bedroom, a house's value increases by $6.60 thousand, if all other variables

remain constant.

For every additional bedroom, a house's value increases by $6.60/18.2 thousand = $0.36

thousand, if all other variables remain constant.

For every additional bedroom, a house's value increases by $(6.60 + 36.4*number of bathrooms)

thousand, if all other variables remain constant.

For every additional bedroom, a house's value decreases by $18.20 thousand, if all other

variables remain constant.

Adding two additional bedrooms, a house's value increases by $6.60 thousand, if all other

variables remain constant.

Provide an economic interpretation for the coefficient of "Age*Basement.

All else equal, houses with an unfinished basement depreciate (=decrease in value), on average,

at a rate of $1.5 thousand per year slower than houses with finished basement.

All else equal, houses with a finished basement depreciate (=decrease in value), on average, at a

rate of $1.5 thousand per year slower than houses with unfinished basement.

All else equal, houses with a finished basement depreciate (=decrease in value), on average, at a

rate of $1.5 thousand for each additional year of age.

All else equal, houses with an unfinished basement depreciate (=decrease in value), on average,

at a rate of $1.5 thousand for each additional year of age.

The coefficient has no economic meaningful interpretation!

The analyst has additional information available on whether or not the house has a swimming

pool (denoted by the variable "Pool" which equals 1 if the house has a pool and equals 0

otherwise). The analyst conjectures that the rate of depreciation for each additional year of age

is faster for houses without a pool. In order to investigate that specific conjecture, the analyst has

to...

a. ... include the variable "Pool" into the above regression model.

b. ... include the variable "Basement*Pool" into the above regression model.

c. ... include the variable "Age*Pool" into the above regression model.

d. ... include the variable "Exp(Pool)" into the above regression model.

e. ... include the variable "Log(Pool)" into the above regression model.