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

question 4

Essay

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

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Definitions:

Courage

The ability to confront fear, pain, danger, uncertainty, or intimidation.

Entrepreneurship

The act of creating, developing, and managing a new business venture to profit by taking on financial, psychological, and social risks.

Myths

Traditional stories, typically involving supernatural beings or events, that serve to explain a natural or social phenomenon, or cultural beliefs.

Realities

The state of things as they actually exist, as opposed to how they may appear or might be imagined.