Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Problem 13

You are in the market for a new house and have decided to bid for a house at auction. You believe that the value of the house is between \(\$ 125,000\) and \(\$ 150,000\) but you are uncertain as to where in the range it might be. You do know, however, that the seller has reserved the right to withdraw the house from the market if the winning bid is not satisfactory. a. Should you bid in this auction? Why or why not? b. Suppose you are a building contractor. You plan to improve the house and then to resell it at a profit. How does this situation affect your answer to (a)? Does it depend on the extent to which your skills are uniquely suitable to improving this particular house?

Short Answer

Expert verified
a. Bidding in this auction is a decision that depends on personal risk tolerance, perceived value of the house, and potential for profit. There is no definitive 'yes' or 'no'. b. As a building contractor, the potential for improving the house and making a profit may affect the decision. If the contractor's skills can greatly increase the value of the house, this may provide an extra incentive to bid.

Step by step solution

01

Analyzing the Auction Situation

Firstly, remember that when bidding on a house at auction, one must bear in mind the value they place on the house and the potential for resale. Given the data, the value of the house is somewhere between \$ 125,000 and \$ 150,000. A key point to remember is that the seller reserves the right to withdraw the house from the market if the final bid does not meet their expectations. This possibility presents an element of risk.
02

Deciding to Bid

To decide whether to bid, take into account the assessed value of the house, personal willingness to bid within the given range, and readiness to accept the risk should the seller decide to withdraw the house from auction. It's a personal decision based on one's appraisal of value and tolerance for risk. Since there is an unknown quantity, there isn't a definite 'yes' or 'no' answer, as the decision ultimately depends on individual perceptions and assessments.
03

Factoring in Contractor's Perspective

As a building contractor, more factors come into play. The decision to bid may be influenced by the potential profitability after upgrading and reselling the house. This depends on the contractor's unique abilities to improve upon the current value of the house. If the contractor's skills are uniquely suitable for this particular house, then there may be significant potential for profit. This may provide an extra incentive to bid.
04

Concluding

In conclusion, whether to bid and the answer to (a) depend on individual risk tolerance and the perceived potential for profit. This could be altered greatly by unique abilities in the context of improving this particular house.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

You play the following bargaining game. Player \(A\) moves first and makes Player \(B\) an offer for the division of \(\$ 100\). (For example, Player \(A\) could suggest that she take \(\$ 60\) and Player \(B\) take \(\$ 40 .\) ) Player \(B\) can accept or reject the offer. If he rejects it, the amount of money available drops to \(\$ 90,\) and he then makes an offer for the division of this amount. If Player \(A\) rejects this offer, the amount of money drops to \(\$ 80\) and Player \(A\) makes an offer for its division. If Player \(B\) rejects this offer, the amount of money drops to 0 Both players are rational, fully informed, and want to maximize their payoffs. Which player will do best in this game?

Defendo has decided to introduce a revolutionary video game. As the first firm in the market, it will have a monopoly position for at least some time. In deciding what type of manufacturing plant to build, it has the choice of two technologies. Technology \(A\) is publicly available and will result in annual costs of \\[ C^{A}(q)=10+8 q \\] Technology \(B\) is a proprietary technology developed in Defendo's research labs. It involves a higher fixed cost of production but lower marginal costs: \\[ C^{B}(q)=60+2 q \\] Defendo must decide which technology to adopt. Market demand for the new product is \(P=20-Q\), where \(Q\) is total industry output. a. Suppose Defendo were certain that it would maintain its monopoly position in the market for the entire product lifespan (about five years) without threat of entry. Which technology would you advise Defendo to adopt? What would be Defendo's profit given this choice? b. Suppose Defendo expects its archrival, Offendo, to consider entering the market shortly after Defendo introduces its new product. Offendo will have access only to Technology \(A\). If Offendo does enter the market, the two firms will play a Cournot game (in quantities) and arrive at the CournotNash equilibrium. i. If Defendo adopts Technology \(A\) and Offendo enters the market, what will be the profit of each firm? Would Offendo choose to enter the market given these profits? ii. If Defendo adopts Technology \(B\) and Offendo enters the market, what will be the profit of each firm? Would Offendo choose to enter the market given these profits? iii. Which technology would you advise Defendo to adopt given the threat of possible entry? What will be Defendo's profit given this choice? What will be consumer surplus given this choice? c. What happens to social welfare (the sum of consumer surplus and producer profit) as a result of the threat of entry in this market? What happens to equilibrium price? What might this imply about the role of potential competition in limiting market power?

An antique dealer regularly buys objects at hometown auctions whose bidders are limited to other dealers. Most of her successful bids turn out to be financially worthwhile because she is able to resell the antiques for a profit. On occasion, however, she travels to a nearby town to bid in an auction that is open to the public. She often finds that on the rare occasions in which she does bid successfully, she is disappointed the antique cannot be sold at a profit. Can you explain the difference in her success between the two sets of circumstances?

You are a duopolist producer of a homogeneous good. Both you and your competitor have zero marginal costs. The market demand curve is \\[ P=30-Q \\] where \(Q=Q_{1}+Q_{2} . Q_{1}\) is your output and \(Q_{2}\) your competitor's output. Your competitor has also read this book. a. Suppose you will play this game only once. If you and your competitor must announce your outputs at the same time, how much will you choose to produce? What do you expect your profit to be? Explain. b. Suppose you are told that you must announce your output before your competitor does. How much will you produce in this case, and how much do you think your competitor will produce? What do you expect your profit to be? Is announcing first an advantage or a disadvantage? Explain briefly. How much would you pay for the option of announcing either first or second? c. Suppose instead that you are to play the first round of a series of 10 rounds (with the same competitor). In each round, you and your competitor announce your outputs at the same time. You want to maximize the sum of your profits over the 10 rounds. How much will you produce in the first round? How much do you expect to produce in the tenth round? In the ninth round? Explain briefly. d. Once again you will play a series of 10 rounds. This time, however, in each round your competitor will announce its output before you announce yours. How will your answers to (c) change in this case?

Many industries are often plagued by overcapacity: Firms simultaneously invest in capacity expansion, so that total capacity far exceeds demand. This happens not only in industries in which demand is highly volatile and unpredictable, but also in industries in which demand is fairly stable. What factors lead to overcapacity? Explain each briefly.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free