Asked by Jasmyne Daise on Apr 29, 2024
Verified
A dealer decides to sell an oil painting by means of an English auction with a reservation price of slightly below $100,000.If she fails to get a bid as high as her reservation price, she will burn the painting.There are two bidders.The dealer believes that each bidder's willingness to pay will take one of the three following values: $110,000, $100,000, and $25,000.The dealer believes that each bidder has a probability of 1/3 of having each of these three values.The probability distribution of each buyer's value is independent of that of the other's.Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the painting is slightly less than
A) $89,000.
B) $100,000.
C) $105,000.
D) $80,000.
E) $78,333.33.
Reservation Price
The maximum price a consumer is willing to pay for a good or service.
English Auction
A method of sale consisting of public bidding where the price ascends, and the highest bid wins the item.
Bid
An offer of a price by a buyer to a seller for goods, services, or financial assets.
- Understand the concept and working mechanism of English auctions.
- Analyze the expected revenue from auctions with different reservation prices.
- Comprehend bidder strategies in auctions without collusion.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
B
Explanation :
The dealer's expected revenue is slightly less than $100,000 because the reservation price is set just below this amount. The auction format and the independent valuation of the bidders suggest that the final bid will approach the second-highest valuation among the bidders. Given the distribution of possible valuations ($110,000, $100,000, $25,000) and the reservation price, it's likely that the auction will result in a bid close to but not exceeding $100,000, assuming rational bidding behavior and no collusion. The presence of a reservation price ensures that the painting will not be sold for less than this threshold, setting the expected revenue just below $100,000.
Learning Objectives
- Understand the concept and working mechanism of English auctions.
- Analyze the expected revenue from auctions with different reservation prices.
- Comprehend bidder strategies in auctions without collusion.