Author Question: Suppose you had information on the sales of similar homes just east and just west of the boundary ... (Read 88 times)

fnuegbu · **on:** Jun 29, 2018

Suppose you had information on the sales of similar homes just east and just west of the boundary between two school districts. How could you use those data to estimate the value parents place on the quality of their children's schools?

What will be an ideal response?

Question 2

What does it mean for a firm to be breaking even?

What will be an ideal response?

beccamahon · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Families optimize when they choose homes. Suppose schools on the west side of the school boundary are better than the schools on the east side. Families are willing to buy homes on both sides of the boundary. This means that when families optimize they do just as well buying a home in either school district. Therefore, the prices of homes on the east side have to be just enough lower than the prices on the west side to persuade families to live in either district. A well-known study by Sandra Black relied on this line of argument and found that parents were willing to pay 2.5 percent more for a home if their children could attend schools with 5 percent higher test scores.
See Sandra E. Black Do Better Schools Matter? Parental Valuation of Elementary Education, Quarterly Journal of Economics, May

Answer to Question 2

If a firm is breaking even, it is earning exactly a normal rate of return. This means that total revenue is just enough to cover all economic costs including a normal profit.