5. Arya’s utility function is u(W) = 10√W. Her initial wealth is $50,000. Arya is considering violating Covid-19 lockdown curfew rules (9PM – 5AM) to go out of her house during curfew hours to meet her partner. The Victoria Government is planning on impose fines on residents who violate curfew rules. The Government is considering implementing one of the three following penalty rules:

(i) Penalty 1: $1000 and the probability of catching a violator is 0.25

(ii) Penalty 2: $2000 and the probability of catching a violator is 0.25

(iii) Penalty 3: $1000 and the probability of catching a violator is 0.50

a) According to the Expected Utility theory, which type of penalty by the government will have maximal impact on Arya if she decides to violate the curfew rules? Explain.

b) Given what you learned from behavioural economics, would you expect the type of penalty in your answer to the above question to be effective? Explain.