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?

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