You are new consultants working with onthehouse.com.au. In order to better calibrate their models, your supervisor has asked your group to develop a model to appraise the price of homes in Melbourne based on the number of bedrooms. In economics, this is commonly called a “Hedonic Regression.”
You will use descriptive statistics and your knowledge of simple regressions to complete this task.
Housing data for 50 single-family units lists housing price data (in 000s) (Dependent Variable) and the number of bedrooms (Independent Variable) for Melbourne are given in the Excel file: Monday (Melbourne).xls.
A. Estimate the descriptive statistics for housing prices and bedrooms via Excel. Be sure to comment on the central tendency and variability. Note: A house where bedroom = 0 means that the house is a studio unit. (1 Mark)
B. Run a simple linear regression using the data in Excel. (1 Mark)
C. Is the coefficient estimate for the number of bedrooms statistically different than zero at the 5% level of significance? Set-up the correct hypothesis test using the results found in the table in Part (B). Interpret the meaning of the coefficient estimate. (2 Marks)
D. What is the predicted housing price for 3 bedroom homes? How does this compare to the 3 bedroom homes in the sample? (1/2 Marks)
E. Interpret the value of R2 (R squared). (1/2 Marks)
F. Do the results suggest that the data satisfy the assumptions of a linear regression? (Hint: LINE) (2 Marks)
G. Explain what some of the general limitations of simple linear regressions are. Do they apply in this case? (1 Mark)