You live in a neighborhood development of very similar homes (roughly the same floor plans and lot sizes). You are considering possible home improvements, not only for their immediate value to you but also for the purpose of raising your home's value over the next five years (when you are likely to sell it to move into a larger house as your family grows). The table shows the prices (in thousands of dollars) of nine homes that have sold during the last 10 months, featuring various improvements.13 The dummy variable "one" indicates the presence of an improvement.
|
Selling Price
|
New Bathroom
|
New Kitchen
|
Landscaping and Patio
|
Pool
|
Central AirConditioning
|
|
272
|
|
1
|
|
1
|
1
|
|
283
|
1
|
|
1
|
1
|
|
|
294
|
|
1
|
1
|
|
1
|
|
253
|
|
1
|
|
|
1
|
|
246
|
1
|
|
|
|
1
|
|
279
|
1
|
|
1
|
|
|
|
319
|
1
|
1
|
1
|
|
|
|
230
|
|
|
|
1
|
|
|
300
|
|
1
|
1
|
|
|
a. Compute a multiple-regression equation estimating a typical home's sales price based on the various improvements. (Hint: Begin by including all five improvements as explanatory variables, coded as dummy variables: a "one" to denote an improvement, a "zero" if the house lacks a given improvement.)
b. Which improvements make a significant positive difference in the value of the typical home in the development?
c. In exploring the costs of making the various improvements, you have found that a new bathroom will cost about $19,000, a new kitchen
$55,000, landscaping and patio $14,000, a pool $38,000, and central air conditioning $11,000. As a purely financial matter, which improvements, if any, would be worth undertaking?