A grapefruit farmer in central Florida is trying to decide whether to take protective action to limit damage to his crop in the event that the overnight temperature falls to a level well below freezing. He is concerned that if the temperature falls sufficiently low and he fails to make an effort to protect his grapefruit trees, he runs the risk of losing his entire crop, which is worth approximately $75,000. Based on the latest forecast issued by the National Weather Service, the farmer estimates that there is a 60% chance that he will lose his entire crop if it is left unprotected. Alternatively, the farmer can insulate his fruit by spraying water on all of the trees in his orchards. This action, which would likely cost the farmer C dollars, would prevent total devastation but might not completely protect the grapefruit trees from incurring some damage as a result of the unusually cold overnight temperatures. The file P06_70.xlsx contains the assessed distribution of possible damages (in dollars) to the insulated fruit in light of the cold weather forecast. The farmer wants to minimize the expected total cost of coping with the threatening weather.
a. Find the maximum value of C below which the farmer should insulate his crop to limit the damage from the unusually cold weather.
b. Set C equal to the value identified in part a. Perform sensitivity analysis to determine under what conditions, if any, the farmer would be better off not spraying his grapefruit trees and taking his chances in spite of the threat to his crop.
c. Suppose that C equals $25,000, and in addition to this protection, the farmer can purchase insurance on the crop. Discuss possibilities for reasonable insurance policies and how much they would be worth to the farmer. You can assume that the insurance is relevant only if the farmer purchases the protection, and you can decide on the terms of the insurance policy.