scenario 1

A farmer faces these odds each year: a 20% chance of a $1.2 million profit, a 50% chance of a $0.4 million profit, and a 30% chance of a $0.6 loss. The farmer could alter these odds by investing in a set of land and capital improvements to his farm. This would result in the following odds (which include the cost of improvements): a 20% chance of $0.6 million profit, a 30% chance of $0.3 million profit, a 20% chance of $0.2 million profit, and a 30% chance of breaking even (zero profit). Suppose the farmer has chosen the first option. What is the most the farmer would be willing to pay for insurance against the possible $0.6 million loss? Assume the farmer is risk-neutral. (Another way to look at it: what is the expected loss facing the farmer?) $0.6 million $0.3 million $0.26 million $0.18 million $0. Risk-neutral people never choose to buy insurance