A farmer with $1000 worth of crops in the field faces a .10 probability that a hail storm will destroy the value of her crop before she can harvest it.If she is risk averse,the most she would be willing to pay to insure against this loss is
A) $0.
B) $10.
C) $100.
D) $900.

Question

Quizplus · Accepted Answer

The farmer is risk averse, which means she wants to avoid risk as much as possible. In this case, the risk is the possibility of losing the entire value of her crops due to a hail storm. The most she would be willing to pay for insurance is the expected value of the loss, which is the value of the loss multiplied by the probability of the loss occurring.

Expected value of loss = $1000 x 0.10 = $100

Therefore, the farmer would be willing to pay up to $100 for insurance to cover the potential loss of her crop. Choice C is the only option within this range.

A Farmer with $1000 Worth of Crops in the Field