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9. What type of risk preferences does John have? Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and can write and enforce an insurance contract that

9. What type of risk preferences does John have? Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and can write and enforce an insurance contract that

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Decision Making in Farming Under Uncertainty** John is a farmer with $225 of wealth. He can either plant corn or beans. If he plants corn, John earns an income of $675 if the weather is GOOD and $0 if the weather is BAD. If he plants beans, John earns an income of $451 under both GOOD and BAD weather. The probability of GOOD weather is 0.7. The probability of BAD weather is 0.3. John’s utility function is \( u(C) = 5\sqrt{C} \), where \( C \) is the value of consumption. Use this information to fill out the table below. (Don’t forget to include the value of wealth when you compute consumption!). The PDF will round all typed numbers to two decimals; however, you should use all decimals when computing your answers. ### Table to Fill Out | | Plant Corn | Plant Beans | |------------------|------------|-------------| | Expected value of consumption | | | | Expected value of utility | | | | Certainty Equivalent | | | | Risk Premium | | | 9. **What type of risk preferences does John have?** *To be determined based on the filled-out table.* --- Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and can write and enforce an insurance contract that requires the farmer to plant corn. Here’s how the insurance contract works. At the beginning of the year, the corn farmer pays an insurance premium of $202.5. If the weather is GOOD, Mae makes no payment to the farmer. If the weather is BAD, Mae makes an indemnity payment of $675 to the farmer. 10. **If a farmer buys this insurance contract, what is Mae’s expected profit?** *To be calculated based on the probability of weather conditions and the farmer's insurance premium.* --- ### Diagram Explanations: There are no graphs or diagrams included in the provided text.
Transcribed Image Text:**Decision Making in Farming Under Uncertainty** John is a farmer with $225 of wealth. He can either plant corn or beans. If he plants corn, John earns an income of $675 if the weather is GOOD and $0 if the weather is BAD. If he plants beans, John earns an income of $451 under both GOOD and BAD weather. The probability of GOOD weather is 0.7. The probability of BAD weather is 0.3. John’s utility function is \( u(C) = 5\sqrt{C} \), where \( C \) is the value of consumption. Use this information to fill out the table below. (Don’t forget to include the value of wealth when you compute consumption!). The PDF will round all typed numbers to two decimals; however, you should use all decimals when computing your answers. ### Table to Fill Out | | Plant Corn | Plant Beans | |------------------|------------|-------------| | Expected value of consumption | | | | Expected value of utility | | | | Certainty Equivalent | | | | Risk Premium | | | 9. **What type of risk preferences does John have?** *To be determined based on the filled-out table.* --- Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and can write and enforce an insurance contract that requires the farmer to plant corn. Here’s how the insurance contract works. At the beginning of the year, the corn farmer pays an insurance premium of $202.5. If the weather is GOOD, Mae makes no payment to the farmer. If the weather is BAD, Mae makes an indemnity payment of $675 to the farmer. 10. **If a farmer buys this insurance contract, what is Mae’s expected profit?** *To be calculated based on the probability of weather conditions and the farmer's insurance premium.* --- ### Diagram Explanations: There are no graphs or diagrams included in the provided text.
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