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Questions › DSE › DSE 2019 › Q32
0 marksEconometrics › Dummy variables and functional forms › Dummy variables and the dummy variable trapEasyabout 1 min

DSE 2019 Question 32: Dummy variables and functional forms

Scenario 3: Data from a random sample of 107 home sales in 2003 yielded the regression P^=119.2+0.485 BD+23.4 BA+0.156 HS+0.002 PS+0.090 A−35.6 PC\hat P=119.2+0.485\,BD+23.4\,BA+0.156\,HS+0.002\,PS+0.090\,A-35.6\,PCP^=119.2+0.485BD+23.4BA+0.156HS+0.002PS+0.090A−35.6PC, with standard errors (23.9),(2.61),(10.76),(0.011),(0.00048),(0.311),(10.5)(23.9),(2.61),(10.76),(0.011),(0.00048),(0.311),(10.5)(23.9),(2.61),(10.76),(0.011),(0.00048),(0.311),(10.5) respectively. R2=0.72R^2=0.72R2=0.72, SER=41.5SER=41.5SER=41.5. PPP is price or value (Rs. 1000), BDBDBD is number of bedrooms, BABABA is number of baths, HSHSHS is house size (sq. ft.), PSPSPS is plot size (sq. ft.), AAA is age (years), and PCPCPC is a dummy =1=1=1 if the house is in poor condition and 000 otherwise.

What is the loss in value if a homeowner allows his house to get into 'poor condition'?

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Scenario 3: Data from a random sample of 107 home sales in 2003 yielded the regression P̂=119.2+0.485 BD+23.4 BA+0.156 HS+0.002 PS+0.090 A-35.6 PC, with standard errors (23.9),(2.61),(10.76),(0.011),(0.00048),(0.311),(10.5) respectively. R²=0.72, SER=41.5. P is price or value (Rs. 1000), BD is number of bedrooms, BA is number of baths, HS is house size (sq. ft.), PS is plot size (sq. ft.), A is age (years), and PC is a dummy =1 if the house is in poor condition and 0 otherwise. What is the loss in value if a homeowner allows his house to get into 'poor condition'? (A) Rs. 34,300 (B) Rs. 35,600 (C) Rs. 36,000 (D) Rs. 35,100

Also written as: Scenario 3: Data from a random sample of 107 home sales in 2003 yielded the regression P_hat=119.2+0.485 BD+23.4 BA+0.156 HS+0.002 PS+0.090 A-35.6 PC, with standard errors (23.9),(2.61),(10.76),(0.011),(0.00048),(0.311),(10.5) respectively. R^2=0.72, SER=41.5. P is price or value (Rs. 1000), BD is number of bedrooms, BA is number of baths, HS is house size (sq. ft.), PS is plot size (sq. ft.), A is age (years), and PC is a dummy =1 if the house is in poor condition and 0 otherwise. What is the loss in value if a homeowner allows his house to get into 'poor condition'?

Dummy variables and functional forms has come up 20 times in 6 exams since 2011.

What this question tests

This question is on Dummy variables and the dummy variable trap, part of Dummy variables and functional forms in Econometrics.

Using 0-1 variables for categories, how to read their coefficients, and the trap of too many.

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