warrenhallproblem_Presentation

# warrenhallproblem_Presentation - Note that there is a trick...

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You are a contractor bidding on a contract to renovate Warren Hall. The winning bid will have the lowest price. You figure that the winning bid will be between \$500,000 and \$1 million. In particular you estimate that the probabilities of getting the job with different bids are as follows: \$500,000 = .9 \$750,00 = .5 \$1,000,000 = .2 You figure that your costs will be between \$300,000 and \$600,000. In particular here are your estimates of the probabilities of different costs: \$600,000 = .25 \$450,000 = .5 \$300,000 = .25 What should you bid? Bidding on the Warren Hall Contract

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Unformatted text preview: Note that there is a trick which makes this very easy to solve. The expected cost is the same no matter what you bid. The expected cost is: 450K= .25*600K+ .5*450K+ .25*300K So, if you bid 500K, 750K, or 1000K, the expected outcome of winning the contract is 50K, 300K, and 550K respectively. So, one can solve this problem simply by taking the larger of: Bid 500K: .9*50K Bid 750K: .5*300K Bid 1000K: .2*550K The best option is to bid 750K for an expected profit of 150K on average....
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warrenhallproblem_Presentation - Note that there is a trick...

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