Question

A new crop to a peasant region, Belgian Endive, has a mean expected income of 100 pesos uniformly distributed over [50, 150] but the traditional corn crop has mean expected income of 70 pesos, uniformly distributed over [60, 80]. If subsistence is 62, which will be chosen by a "safety-first" peasant?

Answer 1

For a "Safety- First " peasant, It can be assumed that It opts for low-risk option i.e. he would want to maintain a safe income with lesser risk rather than going for an option which can have high gains but also have higher risks involved,

For Belgian Endive,

Expected mean income = 100 pesos & deviation = +/- 50

z= ( 100-62)/50 = 38/50 = 0.76

For Traditional Crop,

Expected mean income = 70 pesos & deviation = +/- 10

z= ( 60-62)/10 = -0.2

Therefore, we can see that although Belgian Endive has higher expected income it also involves a risk of going to 50 pesos as well. However, for traditional crop expected income is less, but it has a lower risk.

|z| (for Belgian Endive) > |z| ( for traditional crop)

Hence,

For a subsistence of 62, a 'safety peasant' will choose traditional crop over Belgian Endive,