A seller knows that there are two bidders for the object he is selling. He belie
ID: 3181531 • Letter: A
Question
A seller knows that there are two bidders for the object he is selling. He believes that with probability 1/2, one has a buyer value of $10 and the other has a buyer value of $15 and, with probability 1/2, one has a buyer value of $7 and the other has a buyer value of $24. He knows that bidders will want to buy the object so long as they can get it for their buyer value or less. He sells it in an English auction with a reserve price which he must set before the auction starts. To maximize his expected profits, he should set the reserve price at $_____________
Explanation / Answer
Thus, he should set the reserve price at $ 14.
Probability Value EV 0.25 10 2.5 0.25 15 3.75 0.25 7 1.75 0.25 24 6 Ex 14Thus, he should set the reserve price at $ 14.
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