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DIS 12 Handout - to fall anywhere between 0 and $ 250 Given...

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Aniko Oery University of California, Berkeley Section 12: Auctions Econ 100A, MICRO-ECONOMIC ANALYSIS, Spring 2010 1 Practice Problems from the 3rd edition of the textbook ”Microeconomics” by Bersanko and Braeutigam 1. What is the winner’s curse? Why can the winner’s curse arise in a common-values auction but not in a private-values auction. 2. You are bidding against one other bidder in a first-price sealed-bid auction with private values. You believe that the other bidder’s valuation is equally likely to lie anywhere in the interval be- tween $ 0 and $ 500. Your own valuation is $ 200. Suppose you expect your rival to submit a bid that is exactly one half of its valuation. Thus, you believe that your rival’s bids are equally likely
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Unformatted text preview: to fall anywhere between 0 and $ 250. Given this, if you submit a bid of Q, the probability that you win the auction is the probability that your bid Q will exceed your rival’s bid. It turns out that this probability is equal to Q 250 . (Don’t worry about where this formula comes from, but you probably should plug in several different values of Q to convince yourself that this makes sense.) Your profit from winning the auction is profit = (200-bid ) · probability of winning . Show that your profit-maximizing strategy is bidding half of your valuation. 1...
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