Hubert 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, Hubert 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 Hubert knows that the fine for parking this way
Hubert 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, Hubert 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
Suppose that Hubert knows that the fine for parking this way is $100, and his opportunity cost (OC) of searching for parking is $20 per day. That is, if he parks on the sidewalk and does not get a ticket, he gets a positive payoff worth $20; if he does get a ticket, he ends up with a payoff of
$___
.
Given that Hubert does not know the
Probability of Ticket
10% 50%
EV of Sidewalk Parking (OC = $20) $ __ $___
Now, suppose Hubert gets a new job that requires him to work longer hours. As a result, the opportunity cost of his time rises, and he now values the time saved from not having to look for parking at $30 per day.
Again, compute the expected value of the payoff from parking on the sidewalk given the two different probabilities of getting a ticket.
Probability of Ticket
10%
50%
EV of Sidewalk Parking (OC = $30)
$__
$__
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 $20. 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 $30.
Despite Hubert’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 10 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 $20. Now that the opportunity cost of searching is $30, at the same chance of getting a ticket, he park illegally.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
