Rachel, Phoebe and Monica are sunflower farmers in the village of Girasol. They each have zero wealth, so their consumpt

Business, Finance, Economics, Accounting, Operations Management, Computer Science, Electrical Engineering, Mechanical Engineering, Civil Engineering, Chemical Engineering, Algebra, Precalculus, Statistics and Probabilty, Advanced Math, Physics, Chemistry, Biology, Nursing, Psychology, Certifications, Tests, Prep, and more.
Post Reply
answerhappygod
Site Admin
Posts: 899603
Joined: Mon Aug 02, 2021 8:13 am

Rachel, Phoebe and Monica are sunflower farmers in the village of Girasol. They each have zero wealth, so their consumpt

Post by answerhappygod »

Rachel, Phoebe and Monica are sunflower farmers in the village of Girasol. They each have zero wealth, so their consumption is equal to the income they earn from their economic activity. Each of them must choose one (and only one) of the following three activities:
Activity 1: Full time farming. Sunflower farming is risky because of a combination of weather and pests. Under full time farming, the farmer works 7 days per week on their farm. There is a 50% probability of having a GOOD harvest and a 50% chance of having a BAD harvest. If the harvest is GOOD, the farmer earns an income of $100. If the harvest is BAD, the farmer earns an income of only $20.
Activity 2: Full time construction work. This activity has no risk. An individual who decides to work full time in construction earns $40 with certainty.
Activity 3: Part-time farming. In this third activity, the farmer works during the week as a sunflower farmer and works in construction during the weekend. Since she is not able to work full time on the farm, the probability of having a GOOD harvest and earning $100 drops to 25%, and the probability of having a BAD harvest and earning only $20 increases to 75%. The individual also earns $10 with certainty as a construction worker (the person earns this $10 from construction in addition to her farm income under both a GOOD and BAD harvest).
Q: What is the expected value of consumption for each activity?
Join a community of subject matter experts. Register for FREE to view solutions, replies, and use search function. Request answer by replying!
Post Reply