Jacques has difficulty finding parking in his neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time he spends searching for parking. On any given day, Jacques knows he may or may not get a ticket, but he also expects that if he were to do it every day, the average amount he would pay for parking tickets should converge to the expected value. If the expected value is positive, then in the long run, it will be optimal for him to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Jacques knows that the fine for parking this way is $100, and his opportunity cost (OC) of searching for parking is $35 per day. That is, if he parks on the sidewalk and does not get a ticket, he gets a positive payoff worth $35; if he does get a ticket, he ends up with a payoff of $ Given that Jacques does not know the probability of getting caught, compute his expected payoff from parking on the sidewalk when the probability of getting a ticket is 10% and then when the probability is 50%. Probability of Ticket 10% 50% EV of Sidewalk Parking (OC = $35) Now, suppose Jacques gets a new job that requires him to work fewer hours. As a result, the opportunity cost of his time falls, and he now values the time saved from not having to look for parking at only $15 per day. Again, compute the expected value of the payoff from parking on the sidewalk given the two different probabilities of getting a ticket. EV of Sidewalk Parking (OC $15) Probability of Ticket 10% 50% Based on the values you found in the first table, use the blue line (circle symbol) to plot the expected value of sidewalk parking on the following graph when the opportunity cost of time is $35. Based on the values you found in the second table, use the orange line (square symbol) to plot the expected value of sidewalk parking when the opportunity cost of time is $15. 50 40 EXPECTED VALUE OF ILLEGAL PARKING -10 -20 -30 -40 10 20 ४ 30 -50 0 20 40 60 PROBABILITY OF TICKET 80 100 EV when OC is $35 EV when OC is $15 Despite Jacques's uncertainty regarding the exact probability of being ticketed, suppose he decides to go ahead and park illegally every business day for two months (a total of 40 times). During the two months, he receives tickets on 9 days. If this is an accurate reflection of the overall probability of receiving a ticket, then there is a chance of receiving a ticket. Given this chance of getting ticketed, he have parked illegally when the opportunity cost of searching was $35. Now that the opportunity cost of searching is $15, at the same chance of getting a ticket, he park illegally.

Jacques has difficulty finding parking in his neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time he spends searching for parking. On any given day, Jacques knows he may or may not get a ticket, but he also expects that if he were to do it every day, the average amount he would pay for parking tickets should converge to the expected value. If the expected value is positive, then in the long run, it will be optimal for him to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Jacques knows that the fine for parking this way is $100, and his opportunity cost (OC) of searching for parking is $35 per day. That is, if he parks on the sidewalk and does not get a ticket, he gets a positive payoff worth $35; if he does get a ticket, he ends up with a payoff of $ Given that Jacques does not know the probability of getting caught, compute his expected payoff from parking on the sidewalk when the probability of getting a ticket is 10% and then when the probability is 50%. Probability of Ticket 10% 50% EV of Sidewalk Parking (OC = $35) Now, suppose Jacques gets a new job that requires him to work fewer hours. As a result, the opportunity cost of his time falls, and he now values the time saved from not having to look for parking at only $15 per day. Again, compute the expected value of the payoff from parking on the sidewalk given the two different probabilities of getting a ticket. EV of Sidewalk Parking (OC $15) Probability of Ticket 10% 50% Based on the values you found in the first table, use the blue line (circle symbol) to plot the expected value of sidewalk parking on the following graph when the opportunity cost of time is $35. Based on the values you found in the second table, use the orange line (square symbol) to plot the expected value of sidewalk parking when the opportunity cost of time is $15. 50 40 EXPECTED VALUE OF ILLEGAL PARKING -10 -20 -30 -40 10 20 ४ 30 -50 0 20 40 60 PROBABILITY OF TICKET 80 100 EV when OC is $35 EV when OC is $15 Despite Jacques's uncertainty regarding the exact probability of being ticketed, suppose he decides to go ahead and park illegally every business day for two months (a total of 40 times). During the two months, he receives tickets on 9 days. If this is an accurate reflection of the overall probability of receiving a ticket, then there is a chance of receiving a ticket. Given this chance of getting ticketed, he have parked illegally when the opportunity cost of searching was $35. Now that the opportunity cost of searching is $15, at the same chance of getting a ticket, he park illegally.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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