SOLUTION: Anna and Rose Farm is deciding whether to protect their pot flowers with metal-framed greenhouses which cost P500,000. Regardless of the greenhouse, the harvests could be sold for

SOLUTION: Anna and Rose Farm is deciding whether to protect their pot flowers with metal-framed greenhouses which cost P500,000. Regardless of the greenhouse, the harvests could be sold for

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Question 1162491: Anna and Rose Farm is deciding whether to protect their pot flowers with metal-framed greenhouses which cost P500,000. Regardless of the greenhouse, the harvests could be sold for P2,000,000 under continued good weather. However, should there be strong typhoons and no greenhouses were placed, flowers could only be sold for P1000,000. With the greenhouses set up and typhoons affecting the flowers of other farms, harvest could be sold at P3,000,000. What must be the probability that there is continued good weather for Anna and Rose Farm to be indifferent to spending the additional cost of the greenhouses?
Answer by solver91311(24713) (Show Source): You can put this solution on YOUR website!

If

is the probability of good weather, you make

million if you build the greenhouse and

million if you don't, so the expected value if there is good weather is

million.

If

is the probability of good weather, then

is the probability of bad weather since so-so weather and its effects are not considered in this problem. If there is bad weather, you make

million if you don't build the greenhouse and

million if you do, so the expected value if there is bad weather is

million.

For indifference, the two expected values must be the same, hence

John

My calculator said it, I believe it, that settles it

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