Lisa just inherited a vineyard from a distant relative. In good years (when there is no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the weather is poor, she loses $20,000. Lisa's estimate of the probability of good weather is 60%.
a. Calculate the expected value and the variance of Lisa's income from the vineyard.
b. Lisa is risk averse. Ethan, a grape buyer, offers Lisa a guaranteed payment of $70,000 each year in exchange for her entire harvest. Will Lisa accept this offer? Explain.
c. Why might Ethan make such an offer?