Imagine that there are two countries, Home and Foreign, and that residents of each own only one asset,
domestic land yielding an annual harvest of kiwi fruit. Assume that the yield on the land is uncertain. Half
the time, Home's land yields a harvest of 100 tons of kiwi fruit at the same time as Foreign's land yields a
harvest of 50 tons. The other half of the time the outcomes are reversed. The Foreign's harvest is 100
tons, but the Home harvest is only 50.
Suppose the two countries can trade shares in the ownership of their perspective assets,
Home residents will buy a 50 percent share of the land in Foreign, and they will pay for it by giving Foreign
residents a 50 percent share in Home land. Calculate the expected value of kiwi fruit for each country.
Sample Solution