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In: Economics

(Option Price) Imagine that a rancher would have an income of $100,000 if his county remains...

(Option Price) Imagine that a rancher would have an income of $100,000 if his county remains free from a cattle parasite but only $50,000 if the county is exposed to the parasite. Imagine that a county program to limit the impact of exposure to the parasite would reduce his income to $93,000 if the county remains free of the parasite but increase it to $75,000 if the county is exposed to the parasite. Assume that there is a 25 percent chance of exposure to the parasite and that the rancher’s utility is the natural logarithm of his income. What is the ranchers option price for the county program? You will find it useful to construct a spreadsheet to compute your solutions.

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Expert Solution

I solved the problem on a paper since its long and complicated. Please see the solution below. Also, I am attaching the calculation excel link. Use the excel along with the solution for better understanding. Please download the excel, if possible, to see the formulas-

Excel link- https://drive.google.com/open?id=14ubZpWE-VXSwz6P54pZDd8X0c01gSUR-

Rahul Sunny answered 2 years ago
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