AEM414 - problem set one_Solutions

# AEM414 - problem set one_Solutions - Problem Set 1 AEM 414...

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Problem Set 1 AEM 414 1. a. The rational bid to make in a Vickrey Auction is the private value that you are given. In this case, your bid would be at 45,000 dollars. The rational bid to make in an English Auction is also the private value that you have. And again, in this case, your bid would be 45,000 dollars. b. Actual observed behavior during Vickrey Auctions is overbidding. If I knew all individuals were behaving in this manner, I would continue to bid at my value. If I did otherwise (bid below value) I would lose to higher bids. In addition, if I bid above my value, I would win the auction, but still lose in terms of profit, since I would be paying above my value. c. In order to take advantage of this phenomenon, I would establish a firm that auctioned off tickets for various events, including sports, concerts, and shows. These items generate interest year round and the population of consumers includes many last-minute purchases. My customers would be middle to upper class members of society around the world. most sales would probably be generated in densely populated cities, and since it would be very difficult to cater to all potential clients, the firm would be based on the web. The mechanism to be applied is that of an English Auction. This way all of the bidders know the highest bid and personal private values are unknown to other participants, allowing prices to inflate. d. An in-person charity auction is one form of a real world auction. In this case, an opening value is provided by an auctioneer, who is a person running the bidding. Bidders then see who bids what, and can base their moves on what is observed in

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## AEM414 - problem set one_Solutions - Problem Set 1 AEM 414...

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