An item is being sold in a first-price sealed-bid auction. There are n> 1 risk neutral bidders. Bidders have private values. Suppose that, prior to the auction, the seller can invest in advertising that affects bidders' private values in a predictable way. If the seller spends a > 0 on advertising, then this results in bidders' private values being independent and uniformly distributed on an interval [0, 7], where ū = √√a. The seller is risk neutral and there are no other costs involved in auctioning the item. a) Explain and derive the optimal advertising expenditure for the seller. b) How would the results from a) change if the item were instead sold using a second-price auction?

An item is being sold in a first-price sealed-bid auction. There are n> 1 risk neutral bidders. Bidders have private values. Suppose that, prior to the auction, the seller can invest in advertising that affects bidders' private values in a predictable way. If the seller spends a > 0 on advertising, then this results in bidders' private values being independent and uniformly distributed on an interval [0, 7], where ū = √√a. The seller is risk neutral and there are no other costs involved in auctioning the item. a) Explain and derive the optimal advertising expenditure for the seller. b) How would the results from a) change if the item were instead sold using a second-price auction?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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