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March 4, 2018

Anubhab, Ed and Xinda are cotton farmers in the village of Qacha’s Nek in rural Lesotho.

Anubhab, Ed and Xinda are cotton farmers in the village of Qacha’s Nek in rural Lesotho. They each have zero wealth

(W=0), so their consumption is equal to the income they earn from their economic activity. Each of them must choose

one (and only one) of the following three activities:



Activity 1: Full time farming with UKM08 cotton seeds: A farmer should work full time (7 days per week) on their

farm if they are cultivating UKM08 cotton. Working full time a farmer has a 50% probability of having a GOOD

harvest and earning income of $420 and a 50% chance of having a BAD harvest and earning only $60.



Activity 2: Full time farming with UK92 cotton seeds: UK92 variety is very well adapted to local weather conditions

and thus has no risk. If a farmer works full time she will earn $210 with certainty.



Activity 3: Part-time farming with UKM08 cotton seeds: In this third activity, a farmer plants UKM08 variety cotton

seeds and works Monday through Thursday on his farm and he works Friday through Sunday as a construction

worker in the nearby city of Geita. Since he is not able to work full-time on the farm, it is more likely that he suffers

damages from pests or bad weather. Specifically, the probability of having a GOOD cotton harvest and earning $420

drops to 25%, while the probability of having a BAD harvest and earning only $60 increases to 75%. The individual

also

earns $60 with certainty as a construction worker (i.e., he earns $60 in addition to his farm income under both

a GOOD and a BAD harvest).

(a) What is the expected value of consumption for each activity?

Economics

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