ABSTRACT
Risk and uncertainty are typically considered defining characteristics of agricultural production. Producers experience not only the vagaries of the markets, but also the possible effects of weather, pests, and diseases which affect crop and livestock yields. Moss (2010) provides an overview of the risk problem presented in Figure 6.1. This figure develops the problem as the choice between two possible actions (a 1 and a 2). In this example, the choice lies between applying 90 pounds of nitrogen per acre or 110 pounds of nitrogen per acre. Regardless of the choice made by the farmer, one of two possible events (E) will occur (either event A or B). The probability that either event will occur is defined by a probability function (P[A] or P[B]). The combination of the farmer’s actions and possible events yields four possible outcomes such as O[α 1|A] which is the outcome of action a 1 given that event A occurs. Moss (2010) develops the problem within the context of corn production. Specifically, he assumes that event A is the case where 30 inches of rain occurs while event B is the case where 35 inches of rain occurs. The associated payoffs (in terms of corn yield and profit per acre) are presented in Table 6.1. Overview of the risk problem https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9780203549353/2225a25f-d8ee-43db-8cf5-4a476df99ab7/content/fig6_1_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/> Source: Moss (2010, p. 3). Yield and profit per acre. https://www.niso.org/standards/z39-96/ns/oasis-exchange/table">
Nitrogen per acre
Rainfall (inches per season)
30
35
Corn yield (bushels per acre)
90
41.71
46.46
110
44.30
49.35
Profit per acre
90
103.95
116.31
110
109.68
122.80
Source: Moss (2010, p. 5)
