An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= .01Q².If the farmer is risk neutral:

Question

Quizplus · Accepted Answer

Since the farmer is risk neutral, he only considers the expected value of his profit. The expected profit-maximizing quantity can be calculated using the formula:

Q* = (2(1.50) + 1(1) + 0.50(2))/0.02 = 150

This means that the farmer should harvest 150 apples. Since the expected profit is positive, the farmer strictly prefers producing to producing nothing. Therefore, the best choice for the farmer is to produce, which is option D.

An Apple Farmer Must Decide How Many Apples to Harvest