Exhibit 9-1
A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing.If the temperature drops too low he runs the risk of losing his entire crop,valued at $75,000.Based on the National Weather Service,the probability of such a temperature drop is 60%.He can insulate his crop by spraying water on all the trees,which will cost $20,000.This action might succeed in protecting the crop,with the following possible outcomes:

-Refer to Exhibit 9-1.Suppose that,in addition to the uncertainty about the probability of freezing,he is also uncertain about the cost of the insulation (could vary from $10,000 to $30,000).To which of these variables is the expected value most sensitive?

Question

Exhibit 9-1
A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing.If the temperature drops too low he runs the risk of losing his entire crop,valued at $75,000.Based on the National Weather Service,the probability of such a temperature drop is 60%.He can insulate his crop by spraying water on all the trees,which will cost $20,000.This action might succeed in protecting the crop,with the following possible outcomes:
 
-Refer to Exhibit 9-1.Suppose that,in addition to the uncertainty about the probability of freezing,he is also uncertain about the cost of the insulation (could vary from $10,000 to $30,000).To which of these variables is the expected value most sensitive?

Quizplus · Accepted Answer

The Answer of Exhibit 9-1
A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing.If the temperature drops too low he runs the risk of losing his entire crop,valued at $75,000.Based on the National Weather Service,the probability of such a temperature drop is 60%.He can insulate his crop by spraying water on all the trees,which will cost $20,000.This action might succeed in protecting the crop,with the following possible outcomes:
 
-Refer to Exhibit 9-1.Suppose that,in addition to the uncertainty about the probability of freezing,he is also uncertain about the cost of the insulation (could vary from $10,000 to $30,000).To which of these variables is the expected value most sensitive?

Exhibit 9-1 a Farmer Must Decide Whether to Take Protective Action to Action