Answer Happy

Question 41 (5 points) Saved A farmer believes that he has oil beneath his 100 acre field. He has two choices. He could either drill his field to produce oil or farm out the land. If he drills, and there is no oil, he loses $250,000 in cost of drilling. If there is oil he gets a profit of $500,000. Otherwise he continues farming out his land at a profit of $50,000. Below is a Table of the profits he could get from each choice with the associated probabilities. Possible Outcomes (Profit/Loss) Decision Alternatives Probability 0.4 Drill Field for Oil (Choice A) Farm out Field (Choice B) Dry Oil Well Producer Oil Well -$250,000 $500,000 $0 $50,000 0.6 a) Calculate the Expected Monetary Value (EMV) of the famer when he "Drills Field for Oil" (Choice A). b) Calculate the investor's Expected Monetary Value (EMV) of the Farmer when he "Farm Out Field" (Choice B). c) Which of the two decision alternatives should the farmer choose to maximize annual return? d) What is the motivation of your decision in c) above? NOTE: Clearly show the methodology used to arrive at your answers.