1. Under favourable weather conditions the management of Flesher farms expect its rasphberry crop to have a $ 120,000/ - market value. An unprotected crop subject to frost has an expectd market...
market value. An unprotected crop subject to frost has an expectd market value of $ 80,000/- .if Flesher protects the raspberries against frost . The market value of the crop is still expected to be $ 120,000/- under frost free condition and $ 180,000/- if a frost occurs. What must be the probability of Frostfor Flescher to be indifferent to spending $ 20,000/- for tents to provide protection.
The cost of the raspberry crop has a market value of $120,000. If it is subjected to frost the value becomes $80,000. The protection of the crop from frost costs $20,000. If the crop is protected and there is frost the market value is 180,000.
Now for Flescher to be indifferent to spending the extra $20,000, the probability of a frost which we assume is P should be such that:
the loss incurred when the crop is not protected * the probability of frost = the profit incurred if there is a frost and the crop is protected
=> P*40,000 = (1-P)* 60000 - 20000
=> 40000P = 60000 - 60000P - 20000
=> 100,000P = 40,000
=> P = 40,000 / 100,000
=> P = 0.4
Therefore if there is a probability of 0.4 that there will be frost, Flescher is indifferent to getting the farm protected.