Question

Valerie 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, Valerie 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 Valerie 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 _______.

Answer 1

Answer: -$85

Explanation:

If Valerie does not get a ticket then she would have a positive payoff of $15 because she avoids the cost of finding parking.

Should she get a ticket however, she will have a payoff of;

= Cost of finding a legal parking - ticket charge

= $15 - $100

= -$85.