QUESTION FIVE: CONSUMPTION UNDER UNCERTAINTY (a) What does it mean for consumers to maximize expected utility? Can you think of a case in which a person might not maximize expected utility? (b) As the owner of a family farm whose wealth is $250,000, you must choose between sitting this season out and investing last year's earnings ($200,000) in a safe money market fund paying 5.0 percent or planting summer com. Planting costs $200,000, with a six-month time to harvest. If there is rain, planting summer corn will yield $500,000 in revenues at harvest. If there is a drought, planting will yield $50,000 in revenues. As a third choice, you can purchase AgriCorp drought-resistant summer corn at a cost of $250,000 that will yield $500,000 in revenues at harvest if there is rain, and $350,000 in revenues if there 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 0.30, while the probability of summer rain is 0.70. Which of the three options should you choose? Explain.

QUESTION FIVE: CONSUMPTION UNDER UNCERTAINTY (a) What does it mean for consumers to maximize expected utility? Can you think of a case in which a person might not maximize expected utility? (b) As the owner of a family farm whose wealth is $250,000, you must choose between sitting this season out and investing last year's earnings ($200,000) in a safe money market fund paying 5.0 percent or planting summer com. Planting costs $200,000, with a six-month time to harvest. If there is rain, planting summer corn will yield $500,000 in revenues at harvest. If there is a drought, planting will yield $50,000 in revenues. As a third choice, you can purchase AgriCorp drought-resistant summer corn at a cost of $250,000 that will yield $500,000 in revenues at harvest if there is rain, and $350,000 in revenues if there 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 0.30, while the probability of summer rain is 0.70. Which of the three options should you choose? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In the field of economics, utility is a measure of how much benefit consumers derive from certain goods or services. From a finance standpoint, it refers to how much benefit investors obtain from portfolio performance. Then, what is the meaning of utility maximization? For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). в Iу SРaгagraph 10pt A I Arial ... P O WORDS POWERED BY TINY > I! > !!! >
Who is most risk-averse? a-an individual with slightly diminishing marginal utility. b-all individuals are equally risk-averse. c-an individual with rapidly diminishing marginal utility. d-an individual who does not experience diminishing marginal utility.
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