Question
On many public train systems, tickets are not collected when riders get on the train. Instead, inspectors periodically go through the train and issue fines
On many public train systems, tickets are not collected when riders get on the train. Instead, inspectors periodically go through the train and issue fines to riders who do not have valid tickets. At the train station in Mumbai, India, there are now entrepreneurs who sell "ticket insurance." For 1/2 the price of the ticket, they guarantee to pay your fine if you are caught without a ticket. Therefore train passengers have three options: (1) buy a ticket, (2) buy the insurance, or (3) buy neither and simply risk paying the fine.
Assume that these vendors are truthful (i.e., will pay the fine if you are caught), that the regular fare for a trip is 10, that the fine for riding without a ticket is 200, that the probability of getting caught is 2%, and that the price for the ticket insurance is 5.
Which of the following are true?
(a) A risk averse person will always buy a ticket (and not buy the insurance).
(b) A risk averse person will always buy the insurance (and not a ticket).
(c) A rick averse person will risk paying the fine. (That is, will not buy a ticket and also not buy the insurance.)
(d) A risk averse person might buy the ticket, or might risk the fine, depending on their level of risk aversion.
(e) A risk averse person might buy the insurance, or might risk the fine, depending on their level of risk aversion.
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