Question

There is a car auction. The price of the car is uniform [0,1000], you do not know the actual value of the car. If you bid higher than the value of the car you get it, if you bid lower than the value of the car you don’t. If you know you can sell it on afterwards for x times its worth, what should you should you bid when: x=1.5 (e.g. For x=1.5, you bid 100, the car is worth 80, you get it and sell it on for 120, which is a 20 profit).

Answer 1

Answer:

You shouldn't bid for this type of car.

Explanation:

In the bidding process, you can only get the car if your bid is higher than the value of the car. Therefore,if 'n' represents the value of the car, the payoff will be equivalent to (1.5)n-x. And we know that n is also equal to 0.5x. Thus, the expected payoff for any bid will be approximately:

(1.5)*0.5x - x = 0.75x - x = -0.25x or -0.25*bid

Therefore, the best option is not to bid for this type of car.