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(1) Suppose the government has decided to lease an offshore ocean area with three sub-regions to three wind energy companies for wind power generation. The three subregions have different amounts of wind and are in different depths of water, which makes the benefits and costs of building wind turbines different in each subregion. The government requires a payment C = $100 million per year to manage and monitor the offshore area. The three wind companies are allowed to submit secret, contractually-binding bids on the three subregions. The bids are shown in the table below. Help the government use the method of Haake, Raith and Su (HRS) to allocate the subregions to the wind companies in a way that is both efficient and equitable/fair. Initial Bids Subregion 1 Subregion 2 Subregion 3 Wind Company 1 $150M $200 M $250M Wind Company 2 $100M $50 M $100M Wind Company 3 $100M $200 M $125M M = million Determine: (a) How should the Subregions be allocated to the Companies to maximize value and achieve efficiency? (b) What Bid Amount is paid by each Company? (c) Calculate the Bid Pool. (e) Calculate and specify any Rebates paid to the Companies to achieve an equitable/fair outcome. (d) Calculate the Bid Surplus. Is the Bid Surplus sufficient to cover the total cost C required by the government? (f) How much money remains (after any rebates are paid) to be split among the Companies and returned to them?

          (1) Suppose the government has decided to lease an offshore ocean area with three sub-regions to three wind energy companies for wind power generation. The three subregions have different amounts of wind and are in different depths of water, which makes the benefits and costs of building wind turbines different in each subregion. The government requires a payment C = $100 million per year to manage and monitor the offshore area. The three wind companies are allowed to submit secret, contractually-binding bids on the three subregions. The bids are shown in the table below. Help the government use the method of Haake, Raith and Su (HRS) to allocate the subregions to the wind companies in a way that is both efficient and equitable/fair.
Initial Bids
Subregion 1 Subregion 2 Subregion 3
Wind Company 1 $150M $200 M $250M
Wind Company 2 $100M $50 M $100M
Wind Company 3 $100M $200 M $125M
M = million
Determine:
(a) How should the Subregions be allocated to the Companies to maximize value and achieve efficiency?
(b) What Bid Amount is paid by each Company?
(c) Calculate the Bid Pool.
(e) Calculate and specify any Rebates paid to the Companies to achieve an equitable/fair outcome.
(d) Calculate the Bid Surplus. Is the Bid Surplus sufficient to cover the total cost C required by the government?
(f) How much money remains (after any rebates are paid) to be split among the Companies and returned to them?
        
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(1) Suppose the government has decided to lease an offshore ocean area with three sub-regions to three wind energy companies for wind power generation. The three subregions have different amounts of wind and are in different depths of water, which makes the benefits and costs of building wind turbines different in each subregion. The government requires a payment C = 100 million per year to manage and monitor the offshore area. The three wind companies are allowed to submit secret, contractually-binding bids on the three subregions. The bids are shown in the table below. Help the government use the method of Haake, Raith and Su (HRS) to allocate the subregions to the wind companies in a way that is both efficient and equitable/fair.
Initial Bids
Subregion 1 Subregion 2 Subregion 3
Wind Company 1150M 200 M250M
Wind Company 2 100M50 M 100M
Wind Company 3100M 200 M125M
M = million
Determine:
(a) How should the Subregions be allocated to the Companies to maximize value and achieve efficiency?
(b) What Bid Amount is paid by each Company?
(c) Calculate the Bid Pool.
(e) Calculate and specify any Rebates paid to the Companies to achieve an equitable/fair outcome.
(d) Calculate the Bid Surplus. Is the Bid Surplus sufficient to cover the total cost C required by the government?
(f) How much money remains (after any rebates are paid) to be split among the Companies and returned to them?

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Principles of Economics
Gregory Mankiw 8th Edition
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Suppose the government has decided to lease an offshore ocean area with three sub-regions to three wind energy companies for wind power generation. The three subregions have different amounts of wind and are in different depths of water, which makes the benefits and costs of building wind turbines different in each subregion. The government requires a payment C = $100 million per year to manage and monitor the offshore area. The three wind companies are allowed to submit secret, contractually-binding bids on the three subregions. The bids are shown in the table below. Help the government use the method of Haake, Raith, and Su (HRS) to allocate the subregions to the wind companies in a way that is both efficient and equitable/fair. Initial Bids Subregion 1 Subregion 2 Subregion 3 Wind Company 1 $150M $200M $250M Wind Company 2 $100M $50M $100M Wind Company 3 $100M $200M $125M M = million Determine: (a) How should the Subregions be allocated to the Companies to maximize value and achieve efficiency? (b) What Bid Amount is paid by each Company? (c) Calculate the Bid Pool. (d) Calculate the Bid Surplus. Is the Bid Surplus sufficient to cover the total cost C required by the government? (e) Calculate and specify any Rebates paid to the Companies to achieve an equitable/fair outcome. (f) How much money remains (after any rebates are paid) to be split among the Companies and returned to them?
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Transcript

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00:01 In this question, we are told that oranthologists determine that birds don't really like to fly over water because it takes more energy to fly over water than over land.
00:12 We have a situation in which birds are on an island that are at least five kilometers from a point in land that will call b, and it will fly to some point c and then fly to its nest line at point d.
00:27 And we know that the points b and d are 13 kilometers apart.
00:31 So we're told that it takes 1 .4 times the energy to fly as much over the water and as of land, and we want to minimize the amount of energy expended for this.
00:44 So in order to do this question, let's consider this distance here, which we'll call x.
00:50 The distance bc is x.
00:56 So therefore, we can say also cd is 13 minus x.
01:02 We can also come up with a situation for the amount of distance from the island to point c, whatever it is.
01:11 By the pythagran theorem, it's equal to 5 squared plus x squared, or just a square root of 25 plus x squared.
01:23 So we know that the distance to travel, the distance i travel is going to be this distance drawn over in blue.
01:39 So i want to go like this as such.
01:42 And let me try to travel.
01:43 Draw direction of motion arrows for you.
01:48 So i know that the distance we have to travel is equal to square root of 25 plus x squared, added to 13 minus x.
02:01 And we know that it's going to take 1 .4 times the amount of energy it takes to fly over land.
02:07 So we're going to call that constant k.
02:12 This determines e of x, the amount of energy that's going to be taken is going to be 1 .4k, being multiplied, by the square root of x squared plus 25 plus 13 minus x.
02:41 We'll distribute the ks itself.
02:48 Flying over the water, it actually costs 1 .4k.
02:52 Flying over the land only costs k energy.
02:55 So the energy won't be written like that.
02:58 It'll have to be written like this.
03:15 Taking the derivative of this, because we'll have to do so anyway, we get that e prime of x will be equal to 1 .4.
03:28 4k times x divided by x squared plus 25 minus k.
03:46 And the first derivative is just remember that we have to use a chain rule here.
03:51 And when we combine the fractions, we're going to get that this is going to be equal to k times 1 .4x minus the square root of x squared plus 25, all divided by the square root of x squared plus 25.
04:09 And we want to set this equal to 0, since the denominator will never be zero, we only really have to consider this equaling 0, 1 .4 times x minus square root of x squared plus 25, and where that equals 0.
04:29 And by solving this equation for x, we're going to have that x will be equal to the positive square root of 25 over 0 .96, which is about 5 .1.
04:47 And we know that this is going to be a minimum.
04:51 So what we want to do is we want to fly 5 .1 kilometers right of the point b.
05:06 Now the second part of this question, let's w and l denote the energy to fly over water and land.
05:15 And we want to figure out what values of w over l mean...
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