Crystal has difficulty finding parking in her neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time she spends searching for parking. On any given day, Crystal knows she may or may not get a ticket, but she also expects that if she were to do it every day, the average amount she 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 her to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Crystal knows that the fine for parking this way is $100, and her opportunity cost (OC) of searching for parking is $15 per day. That is, if she parks on the sidewalk and does not get a ticket, she gets a positive payoff worth $15; if she does get a ticket, she ends up with a payoff of $ Given that Crystal does not know the probability of getting caught, compute her 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% EV of Sidewalk Parking (OC = $15) $3.50 50% -$42.50 Now, suppose Crystal gets a new job that requires her to work longer hours. As a result, the opportunity cost of her time rises, and she now values the time saved from not having to look for parking at $30 per day.
Crystal has difficulty finding parking in her neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time she spends searching for parking. On any given day, Crystal knows she may or may not get a ticket, but she also expects that if she were to do it every day, the average amount she 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 her to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Crystal knows that the fine for parking this way is $100, and her opportunity cost (OC) of searching for parking is $15 per day. That is, if she parks on the sidewalk and does not get a ticket, she gets a positive payoff worth $15; if she does get a ticket, she ends up with a payoff of $ Given that Crystal does not know the probability of getting caught, compute her 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% EV of Sidewalk Parking (OC = $15) $3.50 50% -$42.50 Now, suppose Crystal gets a new job that requires her to work longer hours. As a result, the opportunity cost of her time rises, and she now values the time saved from not having to look for parking at $30 per day.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.5P
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Transcribed Image Text:Crystal has difficulty finding parking in her neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the
opportunity cost of the time she spends searching for parking. On any given day, Crystal knows she may or may not get a ticket, but she also expects
that if she were to do it every day, the average amount she 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 her to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not
searching for parking.
Suppose that Crystal knows that the fine for parking this way is $100, and her opportunity cost (OC) of searching for parking is $15 per day. That is, if
she parks on the sidewalk and does not get a ticket, she gets a positive payoff worth $15; if she does get a ticket, she ends up with a payoff of
$
Given that Crystal does not know the probability of getting caught, compute her 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%
EV of Sidewalk Parking (OC = $15)
$3.50
50%
-$42.50
Now, suppose Crystal gets a new job that requires her to work longer hours. As a result, the opportunity cost of her time rises, and she now values
the time saved from not having to look for parking at $30 per day.
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