Individual Assignment 1: Choice Models

Due Oct. 30 - Submit on Canvas

Points are assigned both on the correctness of the answer and the completeness of the solution – state all assumptions. Show all calculations and equations. Do not use Excel or other software packages.

Problem 1. A greengrocer is selling apples, bananas, and oranges in Leeds, UK. They surveyed a random sample of their customers and estimated a multinomial logit model. The estimated parameters and attribute values are given below. Calculate the choice probability for each alternative assuming a multinomial logit error term.

Alternative	Price	Price Parameter	Unusual Shape (Y/N)	Unusual Shape Parameter	Ripe (Y/N)	Ripeness Parameter	Alternative Specific Constant
Apple	0.84	-0.25	TRUE	-0.1	TRUE	0.3	0
Banana	0.17	-0.25	FALSE	-0.1	FALSE	0.3	0.7
Orange	0.25	-0.25	FALSE	-0.1	TRUE	0.3	-0.9

Problem 2. There is a banana shortage and the price increases by 10%.

What would happen to the selection probabilities for each alternative? Compare the results using a) direct and cross elasticity equations with the result when you b) change the price of bananas and re-calculate the choice probabilities. Why might the two results differ?