Question

Explain the two components (Systematic utility, Random residual) of the random utility models and define them.

Answer 1

The two components of the random utility model: systematic utility and random residual together capture the utility function. Systematic utility includes attributes describing the alternatives and characteristics and preferences of the subject. This can include qualitative or quantitative attributes of the alternatives, information on data, perception of the alternatives, sociio-economic, demographic information on the subject, preferences of the subject etc.

The random residual captures imperfections in the information. It includes error terms, variance, covariance. correlations to capture the distribution.