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MSING019: The Republic of Tazbekistan has found oil – Economics Assignment

Internal Code: MAS6287

Economics Assignment:

1. Suppose that firms must own pollution permits in order to pollute. Suppose that a single permit is being auctioned to two firms. Firm 1 values the permit at £200 and Firm 2 values it at £150. What do you expect the outcome of the auction to be in the case of:
(a) An English auction?
(b) A Dutch auction?
(c) A First-price sealed-bid auction?
(d) A Second-price sealed-bid auction?

2. Suppose that there is an empty apartment in Bloomsbury which UCL owns and is thinking of renting out. There are two families interested in renting the apartment. Family A values the apartment at £1000 per month, while family B values it at £1500 a month. Your friend Bob
tells you that he thinks that family A should get the apartment because it is poorer than family B. Is this Pareto efficient? Can you think of a better outcome which does not upset family A? Carefully explain.

3. The Republic of Tazbekistan has found oil! The drilling rights are set to be auctioned using a second-price sealed bid auction. You work for a major oil company and are asked to visit the site and estimate the value of the oil. Your best estimate is $5billion. On returning to London
your boss insists that your firm should bid $5billion, he explains that ‘bidding your true value is a weakly dominant strategy’. Is he correct? Carefully explain.

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