Question
Spreadsheet assignment: Marie is a poor farmer in Senegal. She has three small plots of 0.5 acres each, and is deciding whether to diversify her
Spreadsheet assignment: Marie is a poor farmer in Senegal. She has three small plots of 0.5 acres each, and is deciding whether to diversify her plots or plant all high risk, high reward maize. Her potential diversification strategy would include one maize plot, one millet plot, and renting one plot out. In a good rainfall year, maize gives 100,000 CFA in profits per acre and millet yields 50,000 CFA per acre. In a bad rainfall year maize yields 0 CFA per acre and millet yields 20,000 per acre. A good year happens 0.75 probability and a bad year with 0.25 probability. Renting a plot yields 30,000 CFA per acre irrespective of rainfall.
1. In a good year, how much will Marie earn if she specializes?
2. In a bad year, how much will Marie earn if she specializes?
3. In a good year, how much will Marie earn if she diversifies?
4. In a bad year, how much will Marie earn if she diversifies?
5. What is her expected value of production if she specializes?
6. What is her expected value of production if she diversifies?
7. Over the long run, how much does diversification cost Marie per year?
8. If Maries utility function is Y0.2, where Y is harvest value, will she specialize or diversify? ( Justify your answer numerically)
9. What if her utility function is Y0.4? ( Justify your answer numerically)
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