Andrew Clark is a mixed-crop producer who has recently diversified into berryproduction. He currently grows berries under contract for a local processor whosells frozen berries. The yield from his small operation is 5000 kilograms per year,and he nets $1/kg selling them into the processed market. Andrew is thinking aboutmaking boutique jams with at least some of his berry crop. He has perfected a berryliqueurjam recipe that he can make in batches of 5,000 jars, with each jar containing200 grams of berries. He estimates that so long as demand is sufficient, he can net$0.75 per jar of jam. However, if demand for boutique jam is not sufficient, he willbe competing in the commercial jam market, and expects to lose $0.20 per jar.Andrew is attempting to determine how many tonnes of berries (if any) to devote tojam production. He has estimated that demand will either be for 1,000, 7,000 or15,000 jars - but he has no knowledge of the probabilities that demand will be low,moderate or high. He has, however, decided that he will run a $2,000 advertisingcampaign if he decides to produce any jam at all.
a) Construct a payoff table for this problem:
b) If Andrew wishes to pursue a conservative strategy, how many tonnes ofberries should he devote to jam production? Explain your answer.
c) If Andrew wishes to pursue an aggressive/optimistic strategy, how manytonnes of berries should he devote to jam production? Explain your answer.
d) Suppose that there is a 10% chance that the demand for jam will be low(1,000), a 50% chance that demand will be moderate (7,000), and a 40%chance that the demand for jam will be high (15,000). Calculate the expectedvalue and the standard deviation associated with each decision alternative.How many tonnes of berries should Andrew devote to jam if he would like tomaximise the expected return from his berry enterprise?
e) Define risk aversion (in economic terms), and discuss the implications of riskaversion for the strategies you identified above.
Q2On 10 September, 2015, the Reserve Bank of New Zealand reduced the Official CashRate (OCR) by 25 basis points, to 2.75 percent.
Explain why the OCR was reduced, and discuss the implications of a lower OCR onthe agricultural sector in New Zealand.
Q3Agricultural Policy
The two figures on the following page provide information on the Producer SupportEstimate (PSE) in several countries. Explain what the graphs suggest about the leveland composition of agricultural support across the globe, and discuss theimplications for both producers and consumers in New Zealand.