Answer to Question #289521 in Microeconomics for Haftu.Gebregziher

Question

1 a farmer faced with the choice of agricultural project A or B.in project A (crop production project ) and project B(dairy farming project ),the outcomes and the probabilities of out comes are as follows ፡

Project A

.10 percent chance of earning the profit of birr 16 million .

.80 percent chance of earning the profit of birr 9 million .

.10 percent chance of earning nothing .

Project B

.40% chance of earning the profit of birr 16 million .

. 30% chance of earning the profit of birr 8 million

.30% chance of earning nothing .

A.what are the expected values of these two projects .

B.which project should you recommend to the farmer and why ?

C.if the utility function of the farmer is u(w)=root of wealth ,where w is wealth of the farmer and which project should the farmer choose and why ?

Answer 1

Project A: Expected value, EV

$(0.001~ ×~birr~16million) + (0.008~ ×~birr~ 9million) + (0.001 ×0)$$= Birr ~88,000.$

Project B: EV=$(0.004 ×Birr~ 16million) + (0.003 × Birr~8million) + (0.003 ×Birr~ 0) = Birr~ 64000 + Birr ~24000 + Birr ~0$

$= Birr ~88,000$

Question 2:

Since the EV of project A is equal to project B, the farmer can therefore embark on any of the two projects.