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Consider a driver who is considering whether to park illegally. By parking illegally, drivers save time and effort worth E. But, by doing so, they expose themselves to the possibility of receiving a parking ticket with a fine F, such that F>E. The probability of being fined is p. Assume the driver has exogenous wealth equal to W. a) What is the driver's expected utility associated with parking illegally? b) Suppose p,E, and F are such that p(W+EF)+(1p)(W+E)=W. Demonstrate graphically that a risk-averse individual would prefer not to park illegally in this case. c) Demonstrate that raising the probability of receiving a fine lowers the expected utility of illegal parking. d) Demonstrate that raising the fine lowers the expected utility of illegal parking. e) Show that a proportionate increase in the fine for illegal parking will have a greater deterrent effect on illegal parking than an equivalent proportionate increase in the probability of receiving a fine. [Hint: use the Taylor series approximation U(W+EF)U(W+E)FU(W+E).] Consider a driver who is considering whether to park illegally. By parking illegally, drivers save time and effort worth E. But, by doing so, they expose themselves to the possibility of receiving a parking ticket with a fine F, such that F>E. The probability of being fined is p. Assume the driver has exogenous wealth equal to W. a) What is the driver's expected utility associated with parking illegally? b) Suppose p,E, and F are such that p(W+EF)+(1p)(W+E)=W. Demonstrate graphically that a risk-averse individual would prefer not to park illegally in this case. c) Demonstrate that raising the probability of receiving a fine lowers the expected utility of illegal parking. d) Demonstrate that raising the fine lowers the expected utility of illegal parking. e) Show that a proportionate increase in the fine for illegal parking will have a greater deterrent effect on illegal parking than an equivalent proportionate increase in the probability of receiving a fine. [Hint: use the Taylor series approximation U(W+EF)U(W+E)FU(W+E).]

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