A farmer believes she has a 20% chance of a $3 million profit on this years corn crop. There is a 50% chance the weather
Posted: Wed Jul 06, 2022 6:22 pm
A farmer believes she has a 20% chance of a $3 million profit onthis years corn crop. There is a50% chance the weather will reduce her profit to $1.5 million.There is also a 30% chance theweather is so bad that she will actually lose $1 million.She also has an alternative plan: Change her crop mix and invest inland improvements. If shetakes this plan, there are four possible profit outcomes, each witha 25% probability: $1.5million, $1 million, $0.8 million, and $0.4 million.
Explain which course of action provides higher expected profit:
Explain which course of action is riskier:
If the farmer expects to face this same tradeoff every year for 40years, which option should shetake, and why?
Explain which course of action provides higher expected profit:
Explain which course of action is riskier:
If the farmer expects to face this same tradeoff every year for 40years, which option should shetake, and why?