Concentrate on obtaining better weather forecasts

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An orange grower in Florida faces a dilemma. The weather forecast is for cold weather and there is a 50% chance that the temperature tonight will be cold and destroy his entire crop which is worth some $50,000. He can take two possible actions to try to alleviate his loss if the temperature drops. First he could set burners in the orchard, this would cost $5000, but he could still incur damage of approximately $15000 to $20000. Second, he could set up sprinklers to spray the trees. If the temperature drops, the water could freeze on the fruit and provide insulation. This method is cheaper ($2,000), but less effective. With the sprinklers he could expect to incur as much as $25000 to $30,000 of the loss with no protective action. Assume that the grower's loss incurred with the burners would be $17,500 and that the loss incurred with the sprinkler would be $27,500. Find the EVPI for the weather conditions Now assume that the loss with the burners is uniformly distributed between $15,000 and $20,000. Also, assume that the loss incurred with the sprinklers is uniformly distributed between $25,000 and $30,000. Now estimate EVPI regarding the losses, under the assumption that a better weather forecast cannot be obtained. Do you think the farmer should put more effort into learning his costs more precisely or should he concentrate on obtaining better weather forecasts?

Reference no: EM131180845

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