A local municipality uses a sealed-bid, first-price auction to sell airport land

Question

A local municipality uses a sealed-bid, first-price auction to sell airport landing rights. The values placed on the landing rights by five competing air carriers are V1 = $25 million, V2 = $18 million, V3 = $ 22 million, V4 = $26 million, V5 = $14 million. The private valuations of industry analysts are independent, random, and uniformly distributed between L = $12 million and H = $50 million. Air carrier 4’s optimal strategy is to bid:

$16.8 million.

$13.6 million.

$23.2 million.

$22.4 million.

$20.0 million.

Explanation / Answer

The correct answer is $20.0 million

Explanation is: Air carrier 3 will bever bid something above 22 million, otherwise he may incur a loss if he wins. So, closest to it is 20 million, so he will bid 20 million.

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