[RoseMarie]

Can someone explain to me how to work this problem? My brain has given up.

Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?

.250

.333

.200

.167

[Globetrotter]

Rose Marie,
Assume that probability of frost is P. Thus, probability of no-frost is (1-P).
If you do not protect your crop, your expected value is 60x(1-P)+40xP.
If you protect, your expected value is 60x(1-P)+90xP-10.

If you are indifferent, both cases should be equal. Thus, giving you an equation.
60x(1-P)+40xP=60x(1-P)+90xP-10.
Solving for P, you get P=1/5.
Is C a correct answer?

[RoseMarie]

It is, thank you so much!!

[Globetrotter]

You are welcome. Good luck on BEC!

[Author]

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