One of the factors determining the size of traffic tickets in Finland is the inc
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Question
One of the factors determining the size of traffic tickets in Finland is the income of the person being issued the ticket. Let's think of speeding as a good that some people in Finland value. Further, we'll think of the price of speeding as the size of the traffic ticket times the probability of being caught speeding (that is assumed here to be the same for everyone). Please scroll down to see both questions.
1. If, instead of trying to minimize speeding, the Finnish government is trying to maximize revenue from speeding tickets, what must it think about the elasticity of demand for speeding of high-income people compared to that of low-income people?
a. If the size of traffic tickets is directly proportional to income, then the Finnish government must think that the elasticities of demand for speeding of high-income and low-income people are the same since the price (relative to income) paid by each is the same.
b.The Finnish government must think that that low-income people have less elastic demand than do high-income people since low-income people are getting charged a lower price.
c. The Finnish government must think that high-income people have less elastic demand than do low-income people since high-income people are getting charged a higher price.
2. Before 1999, Finnish drivers were on the "honor system" and were simply asked their income by the officer issuing the ticket. After 1999, police officers started to look up drivers' incomes before issuing the ticket. Will this ability make price discrimination more or less effective?
a. Price discrimination will be neither more nor less effective since the price of the ticket is not affected by the new technology.
b.Price discrimination will be less effective since the government now has to spend money on devices that could be save by simply asking the driver for his level of income.
c. Price discrimination will be more effective since police officers will now be able to better tell which individuals have less elastic demand.
Explanation / Answer
Answer : 1. (a) If the size of traffic tickets is directly proportional to income, then the Finnish government must think that the elasticities of demand for speeding of high-income and low-income people are the same since the price (relative to income) paid by each is the same.
2. (C) Price discrimination will be more effective since police officers will now be able to better tell which individuals have less elastic demand.
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