PS: Show your work and submit all the Excel files. Problem 1: (25 points) (No credits for just answers without showing the work! So, show your workel) As you all know agriculture is a risky business and as a farm manager you should know how to minimize visk. Citrus bwnckenshin (HLB) is one of the most destructive diseases of citrus in Florida. Suppose that you have a 6-acre citrus farm and the current per unit gross-margin (gross-margin per acre) without HLB is $450. Suppose that a crop consultant estimates that there is a 30% chance of an HLB infestation, which could reduce your per-acre gross margin by 55%). Suppose that the only way to minimize the impact of HLB is through crop insurance and you have three options. First, you can go for full coverage that costs $80/acre. Full coverage is effective, ie, there is no loss in gross margin because the insurance company will reimburse you everything Second, you can go for partial coverage that costs $35/acre, but if the infestation occurs (HLB), you will lose 20% of your per-acre gross margin after accounting for the partial insurance benefit. And of course (third choice), you can decide not to buy insurance at all. 1) Show the possible results of full and partial coverages along with the no-insurance option in a decision tree. s points) 2) What is the expected value of the "total" gross margin for each choice? Would you go for full, partial coverage or no insurance? Why? (12 points) 3) Calculate the risk level associated with each option (full partial and no insurance). (8 points) PS: Show your work and submit all the Excel files. Problem 1: (25 points) (No credits for just answers without showing the work! So, show your workel) As you all know agriculture is a risky business and as a farm manager you should know how to minimize visk. Citrus bwnckenshin (HLB) is one of the most destructive diseases of citrus in Florida. Suppose that you have a 6-acre citrus farm and the current per unit gross-margin (gross-margin per acre) without HLB is $450. Suppose that a crop consultant estimates that there is a 30% chance of an HLB infestation, which could reduce your per-acre gross margin by 55%). Suppose that the only way to minimize the impact of HLB is through crop insurance and you have three options. First, you can go for full coverage that costs $80/acre. Full coverage is effective, ie, there is no loss in gross margin because the insurance company will reimburse you everything Second, you can go for partial coverage that costs $35/acre, but if the infestation occurs (HLB), you will lose 20% of your per-acre gross margin after accounting for the partial insurance benefit. And of course (third choice), you can decide not to buy insurance at all. 1) Show the possible results of full and partial coverages along with the no-insurance option in a decision tree. s points) 2) What is the expected value of the "total" gross margin for each choice? Would you go for full, partial coverage or no insurance? Why? (12 points) 3) Calculate the risk level associated with each option (full partial and no insurance). (8 points)
