A corn farmer is considering two alternatives for selling his crop. The first is a contract where he can sell the rights to the future crop at planting. The second is to sell the crop after harvest. At harvest the farmer estimates that the price of corn will be $10 per bushel with probability 0.5 and $12 per bushel with probability 0.5. The farmer is averse to risk, and his benefit of avoiding the risk of damage to the crop while it is growing (e.g., from a tornado or flood) is worth $50,000 to him. If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he expects a crop of 55,000 bushels. The cost of pesticides is $20,000. The other costs associated with planting and harvesting the crop total $450,000. If the farmer decides to sell the crop at harvest, the expected price per bushel that he will receive is $11.00. Note: ($12 × 0.50 + $10 × 0.50) = $11 What will be his total cost if he uses pesticide?

 

Q10. If the farmer uses pesticide and decides to sell the crop at harvest, what is his expected revenue? (610000 is a wrong answer)

Q11. If the farmer uses pesticide and decides to sell the crop at harvest, what is his expected profit? (140000 is a wrong answer)

Q12. If the farmer does not use pesticide and decides to sell the crop at harvest, what is his expected revenue? (555000 is a wrong answer)

Q13. If the farmer does not use pesticide and decides to sell the crop at harvest, what is his expected profit? (105000 is a wrong answer)

Q14. Should the farmer decide to use pesticide or not? YES

Q15. What is the maximum a purchaser would be willing to pay to the farmer for the rights to the future corn crop assuming they cannot monitor the farmer after purchasing the contract? (720000 is a wrong answer)

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