Insurance Questions Use the information in the table below to answer questions 5-7. Yield Insurance Indemnity Yield Loss Weather Conditions Severe Drought Very Dry Very Wet Flooding Good Weather Great Weather Probability 5% 10% 10% 5% 50% 20% Soybean Yield (bushels/acre) 31 42 55 45 65 70 5. Based in the information in the table, what is the expected soybean yield for this farm in bushels/acre? (10 pts.) 6. Calculate the fair premium for a yield insurance policy which guarantees a yield level of 50 bushels/acre (Yo-50). The price guarantee is $10.00 per bushel (Po-$10.00). An indemnity is paid if actual yield falls below the guaranteed level. Insurance indemnities are calculated by multiplying the yield loss in bushels times the guaranteed price level. Show your work. (10 pts.) 7. Suppose another farm has the following possible yield outcomes and probabilities (see table below). Would the same yield insurance policy be more or less expensive for this farm compared to what you found in question 6? Briefly explain your answer by relating it to the two factors which determine the price of insurance. (10 pts.) Weather Conditions Severe Drought Very Dry Very Wet Flooding Good Weather Great Weather Probability 7% 20% 10% 5% 42% 16% Soybean Yield (bushels/acre) 31 42 55 45 65 70 Insurance Questions Use the information in the table below to answer questions 5-7. Yield Insurance Indemnity Yield Loss Weather Conditions Severe Drought Very Dry Very Wet Flooding Good Weather Great Weather Probability 5% 10% 10% 5% 50% 20% Soybean Yield (bushels/acre) 31 42 55 45 65 70 5. Based in the information in the table, what is the expected soybean yield for this farm in bushels/acre? (10 pts.) 6. Calculate the fair premium for a yield insurance policy which guarantees a yield level of 50 bushels/acre (Yo-50). The price guarantee is $10.00 per bushel (Po-$10.00). An indemnity is paid if actual yield falls below the guaranteed level. Insurance indemnities are calculated by multiplying the yield loss in bushels times the guaranteed price level. Show your work. (10 pts.) 7. Suppose another farm has the following possible yield outcomes and probabilities (see table below). Would the same yield insurance policy be more or less expensive for this farm compared to what you found in question 6? Briefly explain your answer by relating it to the two factors which determine the price of insurance. (10 pts.) Weather Conditions Severe Drought Very Dry Very Wet Flooding Good Weather Great Weather Probability 7% 20% 10% 5% 42% 16% Soybean Yield (bushels/acre) 31 42 55 45 65 70
