Question

A city is considering how much to spend to hire people to monitor its parking meters. The following information is available to the city manager: • Hiring each meter monitor costs $25,000 per year. With one monitoring person hired, the probability of getting a ticket each time one parks illegally is equal to 0.25. • With two monitors, the probability of getting a ticket is 0.50; with three monitors, the probability is 0.75, and with four, it's equal to 1.00 . Currently two monitors are employed, and the fine for overtime parking is $10. Assume first that all drivers are risk neutral. What parking fine would you levy, and how many meter monitors would you hire (1, 2, 3, or 4) to achieve the current level of deterrence against illegal parking at the minimum cost? You should hire meter monitor(s) and charge a fine of $ (Enter your responses rounded to two decimal places.)

Answer 1

You should hire 1 monitor and charge a fine of $20.

Since the drivers are all risk neutral. The current level of deterrence will be achieved by hiring 1 monitor with a 0.25 probability of getting a ticket of 20$ for illegal parking, and the cost will be 25,000$. The expected fine for illegal parking will be 0.25*20=5$

This is the same as the previous case with 2 monitors, where the level of deterrence by 2 monitors with 0.5 probability of getting caught and a fine of 10$ for getting caught, the expected fine for illegal parking will be 0.5*10=5$ which is the same as before. Just the cost for hiring 2 monitors= 2*25000=50,000$ was double was double the before. Also since the expected fine is the same in both cases and the drivers are risk neutral, the level of deterrence by both the cases is the same and hiring 1 monitor has the minimum cost among them.

Hope it's clear. Do ask for any clarifications required.