2.11 Lisa just inherited a vineyard from a distant relative.

In good years (without rain or frost during the 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? Give three reasons, and explain each. One of these reasons should refer to his attitude toward risk.

Illustrate this reason using a diagram that shows the general shape of Ethan’s utility function over income. A