when we think of an auction. The auctioneer calls out a price until somebody accepts the price he calls, at which point he raises the price by a very small amount. He then asks for acceptance of the new price, and when that is accepted, he raises the price again. This continues until no one is willing to accept a new price, at which point the painting is sold to the bidder who accepted the most recent accepted price, which will be the price actually paid by that bidder. Suppose the other bidder has accepted the most recent price the auctioneer called out, and the auctioneer has now called out a slightly higher price. What is Jiao's best response? d. True or False: The seller of the painting SHOULD expect to receive the full valuation of the bidder who has the highest valuation under either of these auction formats. Explain why you answered the way you did. e. In light of your answers in this section, what do you think are the benefits of choosing an auction to sell products? How is an auction like price discrimination?
when we think of an auction. The auctioneer calls out a price until somebody accepts the price he calls, at which point he raises the price by a very small amount. He then asks for acceptance of the new price, and when that is accepted, he raises the price again. This continues until no one is willing to accept a new price, at which point the painting is sold to the bidder who accepted the most recent accepted price, which will be the price actually paid by that bidder. Suppose the other bidder has accepted the most recent price the auctioneer called out, and the auctioneer has now called out a slightly higher price. What is Jiao's best response? d. True or False: The seller of the painting SHOULD expect to receive the full valuation of the bidder who has the highest valuation under either of these auction formats. Explain why you answered the way you did. e. In light of your answers in this section, what do you think are the benefits of choosing an auction to sell products? How is an auction like price discrimination?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:c. Now suppose that this is an English auction, the style that most of us think of
when we think of an auction. The auctioneer calls out a price until somebody
accepts the price he calls, at which point he raises the price by a very small
amount. He then asks for acceptance of the new price, and when that is accepted,
he raises the price again. This continues until no one is willing to accept a new
price, at which point the painting is sold to the bidder who accepted the most
recent accepted price, which will be the price actually paid by that bidder.
Suppose the other bidder has accepted the most recent price the auctioneer called
out, and the auctioneer has now called out a slightly higher price. What is Jiao's
best response?
d. True or False: The seller of the painting SHOULD expect to receive the full
valuation of the bidder who has the highest valuation under either of these auction
formats. Explain why you answered the way you did.
e. In light of your answers in this section, what do you think are the benefits of
choosing an auction to sell products? How is an auction like price discrimination?
What kinds of products would be good to sell via auction?
Transcribed Image Text:2.
Jiao is bidding at an art auction against one other bidder. She values the painting
up for bid at $16 million. No one else at the auction knows her valuation, and she does
not know anyone else's valuation. She and the other bidder know that individual
valuations for the painting among all art lovers range from $10 million to $20 million,
and each value in this range is equally likely to be Jiao's true valuation or her opponent's
true valuation. This means that if a bidder has a valuation of V somewhere between $10
million and $20 million, the probability that the other bidder has a higher valuation is
(S20 million – V)/$10 million.
If Jiao wins the painting at a price of p, her utility will be 16 million – p. If she does not
win the painting, her utility will be 0.
a. Suppose this is a first-price sealed bid auction. This means each bidder submits
one bid in writing, without knowing their opponent's bid, and the bidder who
submits the highest bid wins the item and pays the highest bid. What is Jiao's
expected utility if she bids $16 million? What is her expected utility if she bids
$12 million?
b. True or False: Being truthful (that is, bidding your exact valuation) is a dominant
strategy in this auction format. Explain why you answered the way you did.
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