7.7 A farmer believes there is a 50–50 chance that the next growing season will be abnormally rainy. His expected utility function has the form expected utility = 1 2 ln YNR + 1 2 ln YR

, where YNR and YR represent the farmer’s income in the states of ‘normal rain’ and ‘rainy’, respectively.

a.

Suppose the farmer must choose between two crops that promise the following income prospects:

Crop Wheat Maize YNR

€28 000

€19 000 Which of the crops will he plant?

b.

YR

€10 000

€15 000 Suppose the farmer can plant half his ield with each crop. Would he choose to do so? Explain your result.

c.
d.