offer such a scheme and the farmer would want to accept it? (Just write down the conditions, that is, the mathematical inequalities that B and D should satisfy; don’t try to solve these equations !) (c) For which set of (B,D) values: (i) (19,96) or (ii) (36,56) or (iii) (19,75) the friend would offer and the farmer would accept the scheme? (Plug the values into the inequalities you found in (b) to check) PLEASE ANSWER ALL THE PARTS!
PROBLEM (6) A farmer with expected utility preferences with u(x) = sqaure root(x) can experience a Bountiful or a Dry year with probabilities %80 and %20, and with $100 and $25 worth of crops, respectively.
(a) Calculate the
(b) The farmer’s risk-neutral friend offers him the following “insurance” scheme:
“Give me $B if the year is bountiful and I will compensate you with $D if the year is dry”
What should the numbers B and D be so that the friend would be willing to offer such a scheme and the farmer would want to accept it? (Just write down the conditions, that is, the mathematical inequalities that B and D should satisfy; don’t try to solve these equations !)
(c) For which set of (B,D) values: (i) (19,96) or (ii) (36,56) or (iii) (19,75) the friend would offer and the farmer would accept the scheme? (Plug the values into the inequalities you found in (b) to check)
PLEASE ANSWER ALL THE PARTS!
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