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

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section19.2: Managing Risk

Problem 2QQ

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