As the owner of a family farm whose wealth is $200,000, you must choose between sitting this season out and investing $100,000 in a safe money market fund payin 2 percent (option 1) or planting summer corn (option 2). Planting costs $100,000, with a six-month time to harvest. If there is rain, planting summer corn will yield $400,000 in revenues at harvest. If there is a drought, then planting will yield $50,000 in revenues. As a third choice (option 3), you can purchase AgriCorp drought-resistant corn at a cost of $175,000 that will yield $400,000 in revenues at harvest if there is rain, and $300,000 in revenues if their is a drought. You are risk averse, and your preference for family wealth (W) is specified by the relationship U(W) = √/W. The probability of a summer drought is 40 percent, while the probability of summer rain is 60 percent. Which of the three options should you choose? Explain. You should choose because it generates the highest risk expected utility dollar amount

As the owner of a family farm whose wealth is $200,000, you must choose between sitting this season out and investing $100,000 in a safe money market fund payin 2 percent (option 1) or planting summer corn (option 2). Planting costs $100,000, with a six-month time to harvest. If there is rain, planting summer corn will yield $400,000 in revenues at harvest. If there is a drought, then planting will yield $50,000 in revenues. As a third choice (option 3), you can purchase AgriCorp drought-resistant corn at a cost of $175,000 that will yield $400,000 in revenues at harvest if there is rain, and $300,000 in revenues if their is a drought. You are risk averse, and your preference for family wealth (W) is specified by the relationship U(W) = √/W. The probability of a summer drought is 40 percent, while the probability of summer rain is 60 percent. Which of the three options should you choose? Explain. You should choose because it generates the highest risk expected utility dollar amount

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

As the owner of a family farm whose wealth is $200,000, you must choose between sitting this season out and investing $100,000 in a safe money market fund paying
2 percent (option 1) or planting summer corn (option 2). Planting costs $100,000, with a six-month time to harvest. If there is rain, planting summer corn will yield
$400,000 revenues at harvest. If there is a drought, then planting will yield $50,000 in revenues. As a third choice (option 3), you can purchase AgriCorp
drought-resistant corn at a cost of $175,000 that will yield $400,000 in revenues at harvest if there is rain, and $300,000 in revenues if their is a drought. You are risk
averse, and your preference for family wealth (W) is specified by the relationship
U(W)=√W.
The probability of a summer drought is 40 percent, while the probability of summer rain
Which of the three options should you choose? Explain.
You should choose
because it generates the highest
risk
expected utility
dollar amount
60 percent.

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