A farmer has the utility function U=C^0.5 and faces a choice between planting a

Question

A farmer has the utility function U=C^0.5 and faces a choice between planting a risky high yield variety of maize or planting the traditional variety. The outcomes and probabilities are summarized in the table below:

Different from the example in class, the farmer is now endowed with an initial wealth level of 500. So his/her consumption is the amount that they get from the Maize planted +500. (e.g., if a farmer gets 1444 income from maize planting, their consumption is 1444+500=1944).

Q6. In section, we went over the example where the same farmer started with 0 wealth (everything else the same, except initial wealth level), and found he/she would prefer the Traditional Variety. In this example which of the following statements is TRUE?

Variety Probability of Good outcome Income in Good outcome Probability of Bad outcome Income in Bad outcome High-Yield Maize 0.5 1444 0.5 100 Traditional Maize 0.5 625 0.5 625

Explanation / Answer

An investor is known as risk averse if he chooses lower returns with known risks rather than higher returns. the farmer chooses the traditional variety, a wealthier farmer is high risk averse. because getting income in traditional variety is lower than high yield variety as a combined.

option a

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