Reference no: EM133063345
When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway.
Suppose a piece of art has recently become available for sale and will be auctioned off to the highest bidder, with the winner paying an amount equal to the second-highest bid. Assume that most collectors know that Eric places a value of $10,000 on the art piece and that he values this art piece more than any other collector. Suppose that if no one else shows up, Eric simply bids $10,000/2=$5,000 and wins the piece of art.
1) The expected price paid by Eric, with no other bidders present, is $ ?
Suppose the owner of the artwork manages to recruit another bidder, Hubert, to the auction. Hubert is known to value the art piece at $8,000.
2) The expected price paid by Eric, given the presence of the second bidder Hubert, is $?
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