After completing his basic model for his father andhis“improved”model with
After completing his basic model for his father andhis“improved”model with the uncertainty about thesize of the harvest, John Junior knew he could helpdecide how many tons of apples to sell forward. Butsomething was nagging him. He suspected there wastypically a relationship between the quantity of applesharvested and the price at market. After all, if his fatherhad a bad year, other farmers might also have bady ears, and this could affect price. As a result, he decided to add a correlation variable to his model to better capture the interaction between the harvest and market price. To explore what correlation did for the decision of how much to sell forward, he decided to analyze how many tons his father should sell forward assuming 0 correlation between price and quantity,þ0.99 correlation, and0.99 correlation. He wondered whether the variables would be that highly correlated.
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