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3. A homeowner in rural Oregon is considering adding defensible space and thinning trees around their home to improve protection against wildfires. The following table
3. A homeowner in rural Oregon is considering adding defensible space and thinning trees around their home to improve protection against wildfires. The following table gives the homeowner's net income under four possible scenarios: with and without a wildfire taking place, and with and without wildfire safety investments on the property. Assume the probability of a wildfire affecting the property is 0.5. Contingency Net Income with Net Income without Probability investments investments No Wildfire 200 300 0.5 Wildfire 350 100 0.5 a. Calculate the expected surplus from the wildfire safety investments. (2 points) b. Assume that the homeowner's utility is given by U(c) = In(c), where c is net income. Set up the equation that would allow you to calculate Option Price. You don't need to calculate it - just set it up. (3 points)
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