Assume we have two identical houses. For instance, each is a 3 bedroom, 3 bath,
ID: 1216433 • Letter: A
Question
Assume we have two identical houses. For instance, each is a 3 bedroom, 3 bath, 2000 square feet white house on a 1 acre lot and both were built in 1996. The single difference is that house B has a scenic lake view and house A is does not. a. If both homes are listed for a price of $200,000, explain what will happen to the prices of these houses before the market reaches equilibrium. Which house is now more expensive? Why? b. What does the difference in the value of the houses represent? 5. Explain the concept of compensating differentials in terms of property and wage hedonics.Explanation / Answer
4 a. The price of the house B with the scenic lake view will be priced high than the House A before the market reaches equilibrium. Hedonic pricing model determines the external, internal factors and the extent to which these factors affects the price of a particular property. House B will be more expensive than House due to the additional amenities of the house.
4b. The difference in the value of the houses represents that House B has a value added facility which can be used to characterize the house. This value added facility is a factor that distinguishes the two houses.
5. The concept of compensating differentials in terms of property and wage hedonics refer to the additional attributes affect the price of the property and the wages offered to the employees. If the wages are low then the supply will be less and if the wages are high then the supply of the workers will then again affect the labor market equilibrium. Once the equilibrium sets in the wage market, then the additional job attributes will add up to the differences in the wages fixed. Similarly the the additional amenities that serve as attributes in enhancing the price of the property determines the difference in price set for the property.