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Travel times on the bus and subway are independent

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Zack is an MIT student who lives in Harvard Square. Each morning he takes the train or the bus to school. Riding the bus takes 5 minutes with probability 1/4 and 20 minutes with probability 3/4. Riding the train takes 7 minutes with probability 1/2 and 12 minutes with probability 1/2.

a. If Zack is risk neutral and only cares about minimizing his travel time, does he take the train or the bus? If he values his time at $0.25 per minute, how much more is he willing to pay for his preferred method of transportation?

b. Assume Zack values his time at $0.25 per minute. He can purchase an MBTA report each morning that tells what the actual travel time will be for both the bus and the subway. How much is he willing to pay for this information? (Travel times on the bus and subway are independent.)

Reference no: EM13333600

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