Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Q13. (page 541)

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 toimprove 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

  1. Yes, you should bid in this auction, considering the chances of an error in estimating the value of the house.

  2. You should participate in the auction as a building contractor only if you can win the bid and improve the house at a rate significantly lower than other prospective buyers, to sell it at a profit.

Step by step solution

01

Step 1. Assessing the bidding decisions

If the estimate of the value of the house is accurate, you should bid in the auction. However, it would be best to consider a margin of error so that you do not end up overvaluing the property and falling prey to the winner’s curse.

If you leave room for error, you can reduce your bid from the high value to that of the next best bidder and then alter your offer accordingly in marginal changes according to the needs of the auction. Having a working knowledge of how auctions operate would act in your favor in this case.

02

Step 2. Assessing the situation of being a building contractor

The majority of the bidders of the house are prospective buyers who wish to purchase the house to live in it. Earlier, you were also a buyer who would have used the house for personal use. Thus, winning the bid meant that you would get to keep the house.

However, now you are a building contractor who has entered the auction with the plan to resell the house after improving it. Therefore, even if you win the bid by paying the highest price, you should still have the capability to resell it later to prospective buyers while earning positive profits.

The only way you can sell the house at a profit after incurring the improvement charges and the cost of winning the bid is to improve the conditions of the house with higher efficiency than the other buyers.

For example, if you win the auction and purchase the house for $100,000, and the repairs cost you $60,000, you will prefer to sell it at a price higher than $160,000. Thus, if the other buyers can buy and improve the house at a higher rate, you will be able to sell it, generating yields from the same.

Therefore, your unique skills in cost-efficient house improvement will alter your decision to participate in the auction in this case.

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

Two major networks are competing for viewer ratings in the 8:00–9:00 p.m. and 9:00–10:00 p.m. slots on a given weeknight. Each has two shows to fill these time periods and is juggling its lineup. Each can choose to put its “bigger” show first or to place it second in the 9:00–10:00 p.m. slot. The combination of decisions leads to the following “ratings points” results:


Network 2

First

Second

Network 1

First

20, 30

18, 18

Second

15, 15

30, 10

a. Find the Nash equilibria for this game, assuming that both networks make their decisions at the same time.

b. If each network is risk-averse and uses a maximin strategy, what will be the resulting equilibrium?

c. What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes first?

d. Suppose the network managers meet to coordinate schedules and Network 1 promises to schedule its big show first. Is this promise credible? What would be the likely outcome?

Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality). Resulting profits are given by the following payoff matrix:

a. What outcomes, if any, are Nash equilibria?

b. If the managers of both firms are conservative and each follows a maximin strategy, what will be the outcome?

c. What is the cooperative outcome?

d. Which firm benefits most from the cooperative outcome? How much would that firm need to offer the other to persuade it to collude?

Question: An antique dealer regularly buys objects at hometownauctions whose bidders are limited to other dealers.Most of her successful bids turn out to be financiallyworthwhile because she is able to resell the antiquesfor a profit. On occasion, however, she travels to anearby town to bid in an auction that is open to thepublic. She often finds that on the rare occasions inwhich she does bid successfully, she is disappointed—the antique cannot be sold at a profit. Can you explainthe difference in her success between the two sets ofcircumstances?

Three contestants, A, B, and C, each has a balloon and a pistol. From fixed positions, they fire at each other’sballoons. When a balloon is hit, its owner is out. When only one balloon remains, its owner gets a \(1000 prize. At the outset, the players decide by lot the order inwhich they will fire, and each player can choose anyremaining balloon as his target. Everyone knows that A is the best shot and always hits the target, that B hitsthe target with probability .9, and that C hits the target with probability .8. Which contestant has the highest probability of winning the \)1000? Explain why.

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 = Q1 + Q2.Q1 is your output and Q2 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?
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