1. Three households are shareholders in a terraced house with just one heated garage. If the garage is used for parking then only one of the households can use it. Alternatively, the garage could be used as a storage space, in which case it could also be split so that each household uses 1/3 of it. A household in possession of garage space is not allowed to rent it out, but the shareholders could decide to rent out the whole garage to an outsider at 300 e/month. Rental income is divided equally between the shareholders. Household reservation values are listed below.

How would the garage be used and what would be the shareholder surplus in each of the following cases? Note that in some cases there may be a range of possible outcomes. Bids are for monthly rent; you can ignore the issue of bid increments and break ties for convenience. The garage is rented out if that generates more revenue than the auction outcome.

1. (a) (5p) A neighboring psychic can observe household reservation values with her perfect mind-reading skills and is given the task of deciding what to do with the garage. She aims to maximize total shareholder welfare.

2. (b) (10p) The garage is not split, and is auctioned using a second price auction.

3. (c) (5p) The garage is not split, and is auctioned using an English auction.

4. (d) (10p) The garage is not split, and is auctioned using a first price auction.

5. (e) (25p) The shareholders use a VCG mechanism to decide whether to split the garage or to rent it out.

Summarize your answers in a table where each household and the shareholder total cor- respond to a row, each part corresponds to a column, and each entry corresponds to the surplus value (e/Month) or its possible range.

Value /Month Parking Storage (1/3) Storage (whole) 210 240 270 390 60 120 Aaltonen Beltonen Ceppl 0 120 240 Value /Month Parking Storage (1/3) Storage (whole) 210 240 270 390 60 120 Aaltonen Beltonen Ceppl 0 120 240