Consider the following model about the auctions. We have two buyers each obtain a private signal about the value of good being auctioned. The signal can be either high (H) or low (L) with equal probability. If both obtain signal H, the good is worth 1; otherwise, it is worth 0. a. What is the expected value of the good1 to a buyer who sees signal L and to a buyer who sees signal H? b. Suppose buyers bid their expected value computed in part (a). Show that they earn negative profit conditional on observing signal H.
Consider the following model about the auctions. We have two buyers each obtain a private signal about the value of good being auctioned. The signal can be either high (H) or low (L) with equal probability. If both obtain signal H, the good is worth 1; otherwise, it is worth 0. a. What is the expected value of the good1 to a buyer who sees signal L and to a buyer who sees signal H? b. Suppose buyers bid their expected value computed in part (a). Show that they earn negative profit conditional on observing signal H.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the following model about the auctions. We have two buyers each obtain a private signal
about the value of good being auctioned. The signal can be either high (H) or low (L) with equal
probability. If both obtain signal H, the good is worth 1; otherwise, it is worth 0.
a. What is the expected value of the good1 to a buyer who sees signal L and to a buyer who sees
signal H?
b. Suppose buyers bid their expected value computed in part (a). Show that they earn negative
profit conditional on observing signal H.
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