Please answer 12 - 14

Now, suppose that the individual has to pay a fine proportional to her income: F = I, where is the rate at which the driver is fined. If the driver is caught speeding, then her income in that state will be: IC = (1 ) I and, consequently, the lottery she faces is given by: LP = [I,(1 ) I; 1 ,] .

10. 11. l2. 13. 14. . Compute the Arrow-Pratt measure of relative risk-aversion for utility function 2. What property does this utility function have? Recall that the Arrow-Pratt measure of relative risk-aversion is given by: I-u\"(I) mum = u'(I) . . Compute the individual's expected utility if the ne is at, U(Lp), and her cer- tainty equivalent under the assumption that her state sub-utility function is given by Equation 2. Calculate the deterrent effect of the at ne, DEF (I) under the same assumption. Does the deterrence effect of a at ne associated with the state sub-utility function in Equation 2, DEF (I), depend on income? If so, how? Does it depend on the the degree of relative risk aversion? If so, how? Compute the individual's expected utility if the ne is proportional, U (L p), and her certainty equivalent under the assumption that her state sub-utility function is given by Equation 2. Calculate the deterrent effect of the proportional ne, DEP (I) using the state sub- utility function in Equation 2 and calculate the individual's certainty equivalent under the same assumptions. Does the deterrence effect 1319;: (I) depend on income? If so, how? Does it depend on the degree of relative risk aversion? If so, how