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Farmer's Contract Choice Calculation
A farmer is offered two non-negotiable contracts by a landowner to cultivate a plot of land for one season:
- Employment Contract: The farmer receives a guaranteed wage of $5,000 for the season.
- Tenancy Contract: The farmer pays a fixed rent of $8,000 for the season and keeps the entire harvest.
The value of the harvest depends on the weather. There is a 50% chance of good weather, resulting in a harvest worth $20,000, and a 50% chance of bad weather, resulting in a harvest worth $10,000.
Assuming the farmer's goal is to maximize their expected income, which contract should they choose? Show your calculations to justify your answer.
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Introduction to Microeconomics Course
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A landowner offers a farmer two possible take-it-or-leave-it arrangements to cultivate a plot of land.
- Arrangement 1 (Employment): The farmer is paid a fixed daily wage to work the land, and the landowner keeps the entire harvest.
- Arrangement 2 (Tenancy): The farmer pays the landowner a fixed monthly rent for the land and keeps the entire harvest for themselves.
Which statement best analyzes the primary difference in risk and incentives for the farmer between these two arrangements?
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