2. Individual Problems 18-2 A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either $6 or $16, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the winning bidder. The following table lists the four possible combinations of bidder values. Each combination is equally likely to occur. On the following table, indicate the price paid by the winning bidder with and without the stated reserve price. Bidder 1 Value Bidder 2 Value Price Without Reserve ($) ($) ($) $6 $6 $6 $16 $16 $6 $16 $16 Probability 0.25 0.25 0.25 0.25 Without a reserve price, the expected price is $ Price with $16 Reserve Price 1111 With a reserve price of $16, the expected price is $ Thus, the

2. Individual Problems 18-2 A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each with a value of either $6 or $16, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the winning bidder. The following table lists the four possible combinations of bidder values. Each combination is equally likely to occur. On the following table, indicate the price paid by the winning bidder with and without the stated reserve price. Bidder 1 Value Bidder 2 Value Price Without Reserve ($) ($) ($) $6 $6 $6 $16 $16 $6 $16 $16 Probability 0.25 0.25 0.25 0.25 Without a reserve price, the expected price is $ Price with $16 Reserve Price 1111 With a reserve price of $16, the expected price is $ Thus, the

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.10P

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2. Individual Problems 18-2
A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the
auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders, each
with a value of either $6 or $16, with both values equally probable. Without a reserve price, the second highest bid will be the price paid by the
winning bidder.
The following table lists the four possible combinations of bidder values. Each combination is equally likely to occur.
On the following table, indicate the price paid by the winning bidder with and without the stated reserve price.
Bidder 1 Value Bidder 2 Value
($)
Price Without Reserve
($)
($)
$6
$6
$16
$16
$6
$16
$6
$16
Probability
0.25
0.25
0.25
0.25
Without a reserve price, the expected price is $
expected price is larger
the reserve price.
Price with $16 Reserve Price
With a reserve price of $16, the expected price is
.
Thus, the

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