What is the economic agent expected income

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Reference no: EM131789224

Question: A risk-averse economic agent with a yearly income off $100,000 inherits a vineyard. In dry years, the vineyard's harvest is worth $100,000; in wet years, the vineyard's harvest is worth $20,000. Each year there is a probability of 60% that the weather is dry.

a) After inheriting the vineyard, what is the economic agent's expected income?

b) In a utility for money diagram, illustrate the agent's monetary outcomes and the agent's expected income.

c) In the diagram, add a utility for money curve and illustrate the agent'sutility outcomes and his expected utility. Suppose a large agri-business offers the agent a long-term contract that pays $68,000 for the vineyard's yearly harvest regardless of the weather.

d) Does the economic agent accept the offer? Why? Suppose instead the economic agent's income of$100,000 is not certain, but it is the expected profit from owning an umbrella factory.

e) In this case, is the economic agent more likely or less likely to accept the offer? Discuss.

Reference no: EM131789224

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