Question

You want to sell your old computer on E-Bay. You think that there may be as many as three bidders who would be interested in your machine. Although you are not sure how much they value your computer, you believe that each potential bidder may equally well value it at $50, $80, or $90. The bid increment is $1. Should you set a reservation price, and if so, what should it be? [Hint: Calculate the expected return without a reservation price, and then with different possible reservation prices. You might want to set this up on Excel.]

Answer 1

First of all I should set an reservation price for it because it is a good. That means from using the computer I get utility which is positive. If I calculate the expected return without any reservation price then 1/3(50+80+90)=73.33. so surely the value 50$ doesn't come into picture. As expected return (as reservation price=0) is higher than 50. The different possible reservation prices can vary from 0-17$ as73+17=90 which is the maximum amount that a potential bidder will pay.

But in this case bidding price (The bid increment ) increase by $1 so if the first bid is 50 you will reject that for sure but in the next bid if your reservation price is 7.67$ then the trade will occur at price 81. If your reservation price is more higher then it can maximum be( 90+1+1-73.33)=18.67$. this are the possibilities.