Solve the following problem:
Hedonic Pricing
Q: A researcher has gathered a lot of data on house prices and related variables, and has estimated the following regression equation:
Price (in $) = 20000 + 6000 (number of bathrooms) + 90 (floor area of house in square feet) + 9 (area of plot in square feet) - 500 (average ambient SO2 level in micrograms/m3).
What is the expected price of a 900 sq ft house with 2 bathrooms sitting on a 6,000 sq ft plot, where the air quality averages 30 mg/m3?
A town has 160 houses. By reducing emissions from a nearby power plant the ambient SO2 level would be reduced from 30 to 18. The cost of the emissions reduction would be $300,000 in the first year and $100,000 per year thereafter. From a strictly economic perspective, and using an interest rate of 10%, should one invest in reducing emissions? Explain.