Consider fines for speeding. Assume that speeders can drive at either 75 mph or

Question

Consider fines for speeding. Assume that speeders can drive at either 75 mph or 90 mph (the speed limit is 65 mph), and that the probability of being caught at either speed is .01. Also, assume that the maximum possible fine is $10,000, which is set for driving at 90. (a) Suppose an individual has already decided to speed. Calculate the fine for driving at 75 that will discourage her from increasing her speed to 90 unless her gain from doing so is $50 or more. (b) Show that the same degree of marginal deterrence can be achieved by setting the fine at $10,000 for driving at either speed but pulling over those driving at 90 more frequently

Explanation / Answer

Probability of caught is .01

Fine for 90mph is 10000

Expected loss for 90mph speed is =Fine*probability=100

Maximum fine that can be charge for discouraging him to over speed is expected fine form 90mph-50.

Maximum Expected fine for make driver stay in 75mph is $50

Fine is=expected fine/probability=$5000

b.

Fine for both speed is 10000

Probability for 75mph caught is .01

Lets probability of 90mph is x

Expected fine from 90mph-expceted fine from 75mph>50

X*10000-.01*10000>50

X10000=150

X=.15

So by increasing the probability of getting caught for 90mph speed increases then people will deter to drive at this speed.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.