80.2K

Verified Solution

Link Copied!

2. By lowering the probability of insufficient winter chill hours in Fresno County, climate change may affect the best variety of pistachios to grow. Consider the decision between planting an orchard to variety C, the current variety suited to cooler climate with more chill hours, and variety W, suited to warmer climate likely in the future and tolerant of fewer chill hours. Consider the simple case where planting costs are the same, the new orchard lasts 40 years and has no yield until year 10 (Year 2026) for both alternative varieties. The expected price is $3 per pound and costs other than investment are $2 per pound and are the same between varieties. Variety C has an expected yield of 3,000 pounds in every normal year and 1,800 pounds yield in a warm low chill hour year. Variety W has a yield of 2,500 in all years. From 2026 to 2036 the chance of a warm year is zero. In years 2036 to 2056 the chance of a warm year is 0.5. a. If the interest rate is zero and the farm has ready access to credit, which variety does it choose? Explain carefully the criteria you use in this decision and show your calculation using the numbers provided. b. Explain how the variety decision may change if the farm has high cost to variability of income from year to year, such as a high interest rate paid for year to year borrowing and a low interest rate earned for year to year saving. c. Explain how the variety decision may change if the interest rate for long term borrowing to plant the orchard is high. Explain. Simplify and make additional assumptions as needed. d. Explain how the variety decision may change if the interest rate continues to be high, but the probability of a warm year remains 0.5 in the period from 2036 to 2046, but rises to nearly 1.0 by 2056.

Answer & Explanation Solved by verified expert

See Answer