Answered: reserve price is a minimum price set by…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3. Individual Problems 18-3

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 $228 or $304, 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 for 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	Probability
($)	($)	($)
$228	$228	0.25
$228	$304	0.25
$304	$228	0.25
$304	$304	0.25

Without a reserve price, the expected price is_____

. With a reserve price of $304, the expected price is _____

. Thus, the expected price is larger (with or without?) the reserve price.

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