Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 5. (20 points) Last year, a risk-neutral producer suffered major losses because of a virus. Steps have been taken to eradicate the virus and
Question 5. (20 points) Last year, a risk-neutral producer suffered major losses because of a virus. Steps have been taken to eradicate the virus and it is estimated that there is 0.6 probability that the eradication was successful. Planting crop A would yield net return of 70,000 if the virus is absent. Otherwise, a loss of 30,000 will be incurred. Instead, the producer can plant crop B, not sensitive to the virus, that would yield a net return of 40,000. The producer is informed that a fully reliable test can be carried out to indicate whether or not the virus is still present. a. (5 points) What would be the producer's optimal decision if she cannot buy the test? Explain your reasoning. b. (7 points) What is the most the producer should be willing to pay for this perfect test? How did you calculate this? c. (8 points) Does a positive net return for crop B exist that would make the producer unwilling to pay for the test? If so, what is the smallest net return crop B would need to yield
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started