A farmer in Vancouver faces a dilemma. The weather forecast is for hot weather, and there is a 50% chance that the temperature this weekend will be too hot and destroy his entire flower garden, which is worth some $60,000. He can take two possible actions to try to alleviate his loss if the temperature rises (the objective is to maximize his expected flower value). First, he could use mulch which helps keep soil temperatures low. This would cost $3,000, but he could still expect to incur damage of approximately $27,000 to $32,000. Second, he can use shade cloth which offers partial and temporary protection from the sun. This method is more expensive ($6,000), and also more effective. With the shade cloth, he could expect to incur as much as $16,000 to $22,000 of the loss. Compare the farmers expected values for the three alternatives he has, considering the various possible loss scenarios for the mulch and the shade cloth. Which alternative would you suggest the farmer take? Why? (Use sensitivity analysis)
A farmer in Vancouver faces a dilemma. The weather forecast is for hot weather, and there is a 50% chance that the temperature this weekend will be too hot and destroy his entire flower garden, which is worth some $60,000. He can take two possible actions to try to alleviate his loss if the temperature rises (the objective is to maximize his expected flower value). First, he could use mulch which helps keep soil temperatures low. This would cost $3,000, but he could still expect to incur damage of approximately $27,000 to $32,000. Second, he can use shade cloth which offers partial and temporary protection from the sun. This method is more expensive ($6,000), and also more effective. With the shade cloth, he could expect to incur as much as $16,000 to $22,000 of the loss. Compare the farmers expected values for the three alternatives he has, considering the various possible loss scenarios for the mulch and the shade cloth. Which alternative would you suggest the farmer take? Why? (Use sensitivity analysis)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A farmer in Vancouver faces a dilemma. The weather
- First, he could use mulch which helps keep soil temperatures low. This would cost $3,000, but he could still expect to incur damage of approximately $27,000 to $32,000.
- Second, he can use shade cloth which offers partial and temporary protection from the sun. This method is more expensive ($6,000), and also more effective. With the shade cloth, he could expect to incur as much as $16,000 to $22,000 of the loss.
- Compare the farmers expected values for the three alternatives he has, considering the various possible loss scenarios for the mulch and the shade cloth. Which alternative would you suggest the farmer take? Why? (Use sensitivity analysis)
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In the question, it says he has three alternatives. What would the third alternative be?
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