AGRICULTURAL ECONOMICS 330



AGRICULTURAL ECONOMICS 330

Assignment 11

Instructor: Dr. David J. Leatham

1. Suppose you have the following probability distribution. Calculate the mean, variance, standard deviation, and coefficient of variation.

|State of Nature |Profit Level |Probability of |

| | |Occurrence |

|Optimistic |500 |0.3 |

|Most Likely |100 |0.6 |

|Pessimistic |-400 |0.10 |

2. Suppose you are considering growing organic spinach and you are provided with the following information:

□ Organic spinach

➢ Net Return = Price * Quantiy – Cost

➢ NR = PC – C

□ Keep it simple

➢ P, Q, and C are independent

➢ There are only two possible outcomes for P, Q, and C

▪ 8 different possible outcomes for NR

▪ 2x2x2 states of nature

Probability of Outcomes

|Variable |Outcome |Probability |

|Price ($) |1,000 |0.3 |

| |400 |0.7 |

|Yield (Ton) |12 |0.6 |

| |6 |0.4 |

|Cost ($) |3,000 |0.5 |

| |6,000 |0.5 |

A. Prepare a table showing the probability distribution of net returns.

B. Draw the cumulative distribution function (CDF) from the probability distribution in part A (it would be helpful to use Excel). From the CDF, report what the probability will be that net returns will be less than zero.

C. Calculate the mean, variance, standard deviation, and coefficient of variation.

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