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 $$\begin{array} { l l }
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1.Suppose the farmer is not risk-neutral,but instead his behavior can be modeled using an exponential utility function with a risk tolerance parameter of 100,000.What is the most he would be willing to pay for insulation in that case

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 $$\begin{array} { l l } 
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1.Suppose the farmer is not risk-neutral,but instead his behavior can be modeled using an exponential utility function with a risk tolerance parameter of 100,000.What is the most he would be willing to pay for insulation in that case

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 $$\begin{array} { l l } 
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1.Suppose the farmer is not risk-neutral,but instead his behavior can be modeled using an exponential utility function with a risk tolerance parameter of 100,000.What is the most he would be willing to pay for insulation in that case

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

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