1) The return from an investment is uncertain and there is a 25% chance that it
ID: 1195153 • Letter: 1
Question
1)
The return from an investment is uncertain and there is a 25% chance that it will be 100,000 dollars, a 50% chance that it will be 50,000 dollars, and a 25% chance that it will be 20,000 dollars. The expected return from the investment is
45,000 dollars
50,000 dollars
55,000 dollars
75,000 dollars
2)
In a Second-Price, Sealed-Bid auction with independent private values, the optimal strategy is to
Make a bid above your valuation of the item
Make a bid below your valuation of the item
Make a bid equal to your valuation of the item
Not make a bid
A.45,000 dollars
B.50,000 dollars
C.55,000 dollars
D.75,000 dollars
Explanation / Answer
1) Multiplying the chance with the value gives the estimated return
0.25*100000+0.5*50000+0.25*20000 = 55000
2) Vickrey auction is type of sealed-bid auction. Bidders in this type, submit written bids without knowing the bid of other people participated in the auction. The highest bidder is the winner but the price paid is of the second-highest bid.
Correct Option is C. If we calculate the Payoffs, a truthful bidding comes as an optimal strategy.
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