Consider a trade between a buyer and a seller. There are two periods. In the first period the seller invests an amount to buy a plant essential to the production of one unit of an indivisible good. In the second period production and exchange take place. Let denote the production cost in period 2 and let =+100 be the value of the good to the buyer.

1.Under what circumstances is it efficient for trade to occur?

2.Suppose that the amount can be specified in a contract. Can the efficient outcome be attained by the two parties? If yes, under what circumstance.

3.Derive the trading price if the ex-post surplus is divided equally between the parties.

4.If 50 100, what kind of relationship would be optimal for the two firms.