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The U.S. government is auctioning the mining rights to a deposit of copper ore on federal land. The net economic value of the copper ore is $100 million but this fact is not known to anyone. The government will auction the mining rights via a second-price, sealed bid auction.
Suppose that each firm has an estimate of the value of winning the mining rights.
Firm
Estimate (millions of $)
1
80
2
120
3
95
4
115
5
90
Suppose that each firm ignores the possibility that they could have misestimated the value of the mining rights (e.g., Firm 1 assumes that there is no chance that the actual value would be different from $80 million).
Which firm will win the auction?
What would be the winning firm's surplus from the auction?
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