Answered: A reserve price is a minimum price set…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.4IP

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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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