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##### There is uncertainty about next years weather

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solution

**Question**

Part 5 (25 points/139). Farmer Daniel and the Weather.;There is uncertainty about next years weather. With probability it will be a dry year and;with probability it will be a wet year. Farmer Daniel can plant either alfalfa or oregano;but not both. Oregano is a risk-free crop, whereas alfalfas yield is higher in wet years than;in dry years.;t;fcff(cz;Daniels preference relatiRn over money lotteries satisfies the expected utility hypothesis. His;= (1/x), where x > 0 is Daniels wealth in millions of;utility function is;dollars.;u(x);5.;4pt;s av rsio;ow-Pr;rive Daniels;m;re;bsol t;sk;ye io;If Daniel plants oregano his wealth with be x 1 ($1, 000,000), rain or shine. On the other;hand if he plants alfalfa, his wealth be either x = 0.5 with probability 0.5 (dry year), or;x = 2.0 with probability 0.5 (wet year). Then with the outcome set defined in terms of;0;wealth, C = (0.5, 1.0, 2.0), we have two lotteries, the oregano lottery L = (0, 1,0) and the;lottery LA = (0.5,0,0.5).;alfalfa;5.2.._...;5.3;5.4.);(s.);(5s);Calculate the expected value of each lottery.;Expected value.;Expected utility.;Calculate the expected utility of each lottery.;Certainty equivalent.;5.6 (3t.) Decision time.;Calculate the certainty equivalent of each lottery.;Which crop does Daniel plant? Explain.;4pt.) Marginal Rate of Sul;What are the equilibrium MRS value for;3

Paper#18194 | Written in 18-Jul-2015

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