Farm business owners have to make decisions about the future despite not knowing what the future holds As a cattle rancher, you need to make decisions about controlling insects that can have a serious impact on animal growth and development In this assignment, you're asked to model this type of decision Having taken AGEC 325, you know that there are 5 steps to modeling decision making under risk a The source of risk in this problem is insect infestations b The possible outcomes for this are None Few Many Catastrophic c You have three strategies that you are considering Never Don't treat for insects even if insects are observed Always Treat for insects no matter whether any insects are observed or not Scout Scout the cattle and only treat for insects when it makes economic sense to do so d Quantify the consequences or results from each possible outcome e Estimate the risk and expected returns for each strategy You are asked to complete Steps d and e using the following information Maximum Possible Weight 1,260 pounds head Output price $1 85 pound Scouting cost $65 00 head Treatment Cost $100 00 head Treatment Effectiveness with Scouting 80 (Effectiveness refers to the amount of weight loss you save by using the treatment For example, say you would lose 10 pounds of weight without treatment If the treatment is 80 effective, then you would save 8 pounds of that and the actual loss would only be 2 pounds ) Treatment Effectiveness Without Scouting 50 Weight Loss Damage by Level of Insect Infestation Insect Infestations Level Weight Damage None 0 Few 10 Many 25 Catastrophic 100 Based on the problem, there are 15 possible outcome scenarios, as shown in the table below Scenario Treatment Strategy Infestation Level Spraying in Scouting Program 1 Never None 2 Few 3 Many 4 Catastrophic 5 Always None 6 Few 7 Many 8 Catastrophic 9 Scout None No 10 Few No 11 Few Yes 12 Many No 13 Many Yes 14 Catastrophic No 15 Catastrophic Yes 1 Calculate the per head weight, revenue, total costs, and net returns associated with each of the 15 scenarios Partial credit can only be given if work is shown Scenario Weight Revenue Total Costs Net Returns 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2 The Scout strategy is a little different from the other two in that you need to make an additional decision whether or not to treat for insects if you realize Few, Many, or Catastrophic levels of insects Answer the following assuming that your objective is to maximize expected net returns A Would you spray for insects if you realized Few Insects Why or why not B Would you spray for insects if you realized Many Insects Why or why not C What if you realized Catastrophic Insects Why or why not Now, given your answers to Question 2, you now have only 12 possible outcomes because you effectively eliminated 3 of them by the decisions you indicated in Question 2 3 Calculate the expected net returns associated with each of your four strategies Use the following table to help structure your information Note that the probabilities of each outcome are provided Never Treat Scout Treat if Needed Always Treat Number of Insects Probability Value (from above) Weighted Value a Value (from above) Weighted Value a Value (from above) Weighted Value a None 0 60 Few 0 25 Many 0 12 Catastrophic 0 03 Expected Value for Strategy a Equal to the probability of that outcome times the value under that strategy 4 If you make decisions based on maximizing expected returns, which insect control strategy would you select Why 5 What if scouting cost was $135 head Would it affect your decision Why (NOTE You do not need to replicate all of your work to answer this Since the cost of all scenarios related to the Scout Treat if Needed strategy is going up by $70 in this case, then the expected value is going down by $70 )

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Farm business owners have to make decisions about the future despite not knowing what the future holds. As a cattle rancher, you need to make

Farm business owners have to make decisions about the future despite not knowing what the future holds. As a cattle rancher, you need to make decisions about controlling insects that can have a serious impact on animal growth and development. In this assignment, you're asked to model this type of decision. Having taken AGEC 325, you know that there are 5 steps to modeling decision making under risk.

a. The source of risk in this problem is insect infestations.

b. The possible outcomes for this are.

- None

- Few

- Many

- Catastrophic

c. You have three strategies that you are considering.

- Never: Don't treat for insects even if insects are observed

- Always: Treat for insects no matter whether any insects are observed or not

- Scout: Scout the cattle and only treat for insects when it makes economic sense to do so

d. Quantify the consequences or results from each possible outcome

e. Estimate the risk and expected returns for each strategy

You are asked to complete Steps d and e using the following information.

Maximum Possible Weight: 1,260 pounds/head
Output price: $1.85/pound
Scouting cost: $65.00/head
Treatment Cost: $100.00/head
Treatment Effectiveness with Scouting: 80% (Effectiveness refers to the amount of weight loss you save by using the treatment. For example, say you would lose 10 pounds of weight without treatment. If the treatment is 80% effective, then you would save 8 pounds of that and the actual loss would only be 2 pounds.)
Treatment Effectiveness Without Scouting: 50%
Weight Loss Damage by Level of Insect Infestation

Insect Infestations Level	Weight Damage
None	0%
Few	10%
Many	25%
Catastrophic	100%

Based on the problem, there are 15 possible outcome scenarios, as shown in the table below.

Scenario	Treatment Strategy	Infestation Level	Spraying in Scouting Program?
1	Never	None
2		Few
3		Many
4		Catastrophic
5	Always	None
6		Few
7		Many
8		Catastrophic
9	Scout	None	No
10		Few	No
11		Few	Yes
12		Many	No
13		Many	Yes
14		Catastrophic	No
15		Catastrophic	Yes

1. Calculate the per head weight, revenue, total costs, and net returns associated with each of the 15 scenarios. Partial credit can only be given if work is shown.

Scenario	Weight	Revenue	Total Costs	Net Returns
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

2. The "Scout" strategy is a little different from the other two in that you need to make an additional decision; whether or not to treat for insects if you realize Few, Many, or Catastrophic levels of insects. Answer the following assuming that your objective is to maximize expected net returns.

A. Would you spray for insects if you realized Few Insects? Why or why not?

B. Would you spray for insects if you realized Many Insects? Why or why not?

C. What if you realized Catastrophic Insects? Why or why not?

Now, given your answers to Question 2, you now have only 12 possible outcomes because you effectively eliminated 3 of them by the decisions you indicated in Question 2.

3. Calculate the expected net returns associated with each of your four strategies. Use the following table to help structure your information. Note that the probabilities of each outcome are provided

		Never Treat	Scout & Treat if Needed	Always Treat
Number of Insects	Probability	Value (from above)	Weighted Value^a	Value (from above)	Weighted Value^a	Value (from above)	Weighted Value^a
None	0.60
Few	0.25
Many	0.12
Catastrophic	0.03
Expected Value for Strategy

^a Equal to the probability of that outcome times the value under that strategy.

4. If you make decisions based on maximizing expected returns, which insect control strategy would you select? Why?

5. What if scouting cost was $135/head? Would it affect your decision? Why? (NOTE: You do not need to replicate all of your work to answer this. Since the cost of all scenarios related to the "Scout & Treat if Needed" strategy is going up by $70 in this case, then the expected value is going down by $70.)