B is corrent. The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection. In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage. The table below summarizes the possible outcomes.
Frost Frost-free
Protected $180,000
$120,000 Market value Market value
Unprotected $80,000 $120,000
Market value Market value
The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.
Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, this
probability can be calculated as follows:
Loss from damages
× Probability of frost = expected value of the loss
$50,000 × P = $10,000
P = $10,000/$50,000
P = .200
A is incorrect. The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection. In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage. The table below summarizes the possible outcomes.
Frost Frost-freeProtected $180,000 $120,000 Market value Market valueUnprotected $80,000 $120,000
Market value Market value
The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, thisprobability can be calculated as follows:Loss from damages × Probability of frost = expected value of the loss$50,000 × P = $10,000P = $10,000/$50,000P = .200
C is incorrect. The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection. In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage. The table below summarizes the possible outcomes.
Frost Frost-freeProtected $180,000 $120,000 Market value Market valueUnprotected $80,000 $120,000
Market value Market value
The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, thisprobability can be calculated as follows:Loss from damages × Probability of frost = expected value of the loss$50,000 × P = $10,000P = $10,000/$50,000P = .200
D is incorrect. The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection. In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage. The table below summarizes the possible outcomes.
Frost Frost-freeProtected $180,000 $120,000 Market value Market valueUnprotected $80,000 $120,000
Market value Market value
The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, thisprobability can be calculated as follows:Loss from damages × Probability of frost = expected value of the loss$50,000 × P = $10,000P = $10,000/$50,000P = .200
