In deciding to park in an illegal place, any individual knows that the probability of getting a ticket is p and that the fine for receiving the ticket is

f. Suppose that all individuals are risk averse (i.e., Us1W2 , 0, where W is the individual’s wealth).

Will a proportional increase in the probability of being caught or a proportional increase in the fine be a more effective deterrent to illegal parking? Hint: Use the Taylor series approximation U 1W 2 f 2 5 U 1W2 2 fUr 1W2 1 1 f 2

/22Us1W2.