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 Informal Risk Sharing Arrangements Dan is a farmer with zero wealth (so his consumption will equal his income)

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 Informal Risk Sharing Arrangements Dan is a farmer with zero wealth (so his consumption will equal his income). His farm income, y, is subject to risk from pests. Pest infestation can take three possible values: Low, Medium and High. If he works hard (which we will assume he does for parts (a) – (d)) then the probabilities of getting Low, Medium and High infestation levels are 2/5, 2/5, and 1/5 respectively, and his farm income under Low, Medium and High infestation levels is 200, 100, and 0 respectively. Table 9 summarizes these probabilities and incomes. Working hard imposes a utility cost of 10 to Dan. His utility function if he works hard is U(C) = 5VC – 10, where C is his consumption. Table 9. Income and Probabilities if a farmer works hard Pest Infestation Low Medium High Probability 2/5 2/5 1/5 Dan's Income 200 100 0

(a)What is the expected value of income from farming and working hard?

(b)What is Dan’s expected utility if he farms and works hard? Report in TWO decimal places if necessary.

(c)Is Dan risk averse, risk neutral, or risk loving? Explain