THE ECONOMIC EFFICIENCY OF DIVERSIFICATION: CERTAINTY EQUIVALENCE AND THE MEAN-VARIANCE MODEL

The marginal benefit and cost of diversification for Florida orange producers is studied using certainty equivalents. The primary contribution of this study is the application of the mean-variance model to farm management decisions. Results indicate that for moderate and high levels of risk aversion, diversification into strawberry, grapefruit, or additional orange production is not optimal. However, moderately risk-averse Florida orange producers would diversify into grapefruit production, if the annual amortized fixed costs were reduced by as little as 10%.