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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):
log(price)5b01b1log(nox)1b2rooms1u.
(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:
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