Question

I am having trouble understanding what equations to use here. How would I compute this? Thank you!

A farmer is trying to decide whether or not to spray. The cost of spraying is $2,000. Given the frequency of past infestations in the area, the farmer thinks that the probability of infestation occurring is 0.25. Based on past experiences in the area, if an infestation occurs, the probability that the spraying will not be effective is 0.2. The damage caused by a potential infestation is $10,000.

a. If the farmer were to spray, what is the probability of having the joint event of infestation and no success in spraying?

b. Including damages, what is the total expected cost of spraying?

c. Including damages, what is the total expected cost of not spraying?

d. Under the spray option, what is the variance of the costs?

e. Under the no-spray option, what is the variance of costs?

f. What is the standard deviation of the costs under spray option? (whole number)

g.What is the standard deviation of the costs under the no-spray option? (whole number)

With this in mind, would a risk-averse manager and a risk-neutral manager be opt to spray, not spray, or be indifferent to spraying?

Answer 1

Risk avaerse ans Risk neutral manger will opt not to spray because cost is lower there.