The Federal Crop Insurance Corporation (FCIC) was established in 1939 to protect farmers against crop losses caused by the vagaries of weather. That is, in case of default by a farmer due to bad weather, FCIC pays back any debt borrowed from a bank on behalf of the defaulted farmer. Yet, the FCIC has relatively few inspectors inspect individual claims. A farmer in Arizona has a choice between planting water- hungry crop and hardy crop. Both crops cost $100. The gross returns on these plant depend on the annual rainfall. If there is enough rain (the annual rainfall exceeds 12 inch; 20% probability), water- hungry crop's gross return is $300. If there is a drought (the annual rainfall is less than 12 inch; 80% probability), water-hungry crop's gross return is $0. For hardy crop, the gross return is $200 if the annual rainfall exceeds 12 inch (20% probability), and is $120 if the annual rainfall is less than 12 inch (80% probability). Suppose a farmer borrows debt (with limited liability, i.e., pay back the borrowed amount, or everything he has if the cash flow is smaller than the borrowed amount) from a bank to finance the cost of planting crops. In case of farmer's default, the bank gets paid by FCIC. Which plant will the farmer choose? Hardy crop Both are equally preferred Water hungry crop Previous Pare Nevt De