What is the payoff for the farmer

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Reference no: EM133114783

Question - 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 possible outcomes:

Probability

Damage

0.30

$0

0.15

$5,000

0.10

$10,000

0.15

$15,000

0.30

$20,000

Required -

1. What is the payoff for the farmer if the farmer did protect the crops?

2. What is the payoff for the farmer if the farmer did n't do anything to protect the crops?

3. What is the difference in payoffs between farmer insulating crops and farmer not insulating crops?

Reference no: EM133114783

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