The GDP of country A is entirely based on fishing, but the quantity of fish varies...

The GDP of country A is entirely based on fishing, but the quantity of fish varies considerably from year to year. If the ocean’s streams are favorable, the GDP is $250 billion, if it is unfavorable, the GDP is $90 billion. Country’s A society is risk-averse with square-root utility, and the probability of getting a good year is 0.5

a) What is country A’s society expected utility for the coming year?

b) What amount of certain GDP would yield the same level of utility as the expected utility in part A?

Country A realizes that Country B is in an identical situation. Also, country B’s GDP is entirely based on fishing, and with probability 0.5 the GDP is $250 billion, with probability 0.5 the GDP is $90 billion. But Country B’s luck is negatively correlated to Country A’s: when the ocean streams are favorable to Country A, Country B has few fish and vice versa.

c. Compute the expected utility for the two societies if the two countries agree to pool their GDP together and split them equally.

d. What amount of certain GDP would yield the same level of utility as found in part C?

Expert Solution

Rahul Sunny answered 1 year ago

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