1. (30 pts) Consider the following situation: a rational economic agent is choosing be-
tween two alternatives: A and B. The utility from choosing alternative A is UA, and
from choosing alternative B is UB. Alternative A is a status-quo option (an agent
doesn't have to actually DO anything to get alternative A), but an agent has to do
something to get alternative B:
Think about buying a car: you don't have to do anything to NOT BUY A CAR
(alternative A), but you have to actually go to the dealership if you choose to BUY
A CAR (alternative B). Your choice can depend on your income, age, family size,
location, gender, etc.
Therefore, utility of alternative A is normalized to be zero: UA = 0, and utility of
alternative B can depend on individual characteristics of economic agents. You ob-
serve some of these individual characteristics: T1, x2 and x3, but there are also some
characteristics that you do not get to observe (€). Let's assume that the utility from
choosing B is linear and additive in both observable and unobservable characteristics:
UB = Bo + B1X1 + B2X2 + B3X3 + E
You have a sample of randomly selected n individuals. For each individual in your
sample, you have the following information:
yi: takes value A if individual i chose A, or B if they chose B. That is, Yi is a
Thi, regular numeric variables.
x3i=1 if individual i is female, =0 otherwise.
Come up with a model that would allow you to estimate utility parameters Bo through
B3 given the data described above and explain how you'd estimate that model. Clearly
state any assumptions that you make, and any variable(s) that you create.
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