What is the expected value of the object

Assignment Help Microeconomics

Reference no: EM13952789

Alf and Bill are bidding in a conventional English auction for an object of unknown market value: Alf's valuation of the object is Ta, Bill's valuation is Tb and the true value is expected to be Ta + Tb, but at the time of the auction neither bidder knows the other's valuation. However, it is common knowledge that Ta and Tb are drawn from a rectangular distribution with support [T , T ].

1. What is the expected value of the object?

2. From Alf's point of view, what is the expected value of the object, condi- tional on his winning the object?

3. Show that the price 2 min {Ta, Tb1 is an equilibrium.

4. Suppose Alf followed a policy of bidding Ta + ETb and believed that Bill was following the same type of policy. Why might this bidding policy lead to an unfavourable outcome for the winner? (a phenomenon known as "the winner's curse").(Klemperer 1998)

Reference no: EM13952789

Questions Cloud

What happens to the interest rate, income, consumption : According to the IS-LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances? Support your answer with suitable diagrams.

What is meant by the term time value of money : What is meant by the term time value of money? What is meant by the term net present value? What is a post-audit? What are some benefits of conducting post-audits?

What is the government budget constraint : Set up the problem in an alternative, equivalent way where the govern- ment's budget constraint is modelled as a separate constraint in the La- grangean. What must be the value of the Lagrange multiplier on this con- straint at the optimum?

Effects of alcohol on train operators : The topic is effects of alcohol on Train operators / railroad workers

What is the expected value of the object : Alf's valuation of the object is Ta, Bill's valuation is Tb and the true value is expected to be Ta + Tb, but at the time of the auction neither bidder knows the other's valuation. However, it is common knowledge that Ta and Tb are drawn from a re..

How is the project profitability index computed : How is the project profitability index computed, and what does it measure? What is meant by the term payback period? How is the payback period determined?

Determine the net present value of the investment in machine : Determine the net present value of the investment in the machine. What is the difference between the total undiscounted cash inflows and cash outflows over the entire life of the machine?

How do group dynamics impact today workplace : How do group dynamics impact today's workplace? Does corporate culture and leadership come into play? How so? Discuss

How would you make your populace obey and conform : Stanley Milgram's classic experiment of obedience focuses on social control and social conformity. Review Milgram's experiment. If you were King or Queen of your kingdom, what behaviors would you classify as deviant? How would you make your popula..

User Account

All Pages