Question

Suppose your professor comes to class one day and offers to sell a $20 bill to the highest bidder. The only caveat is that in this auction market, the top two bidders have to pay whatever they bid. Your professor knows that as soon as two students are rash enough to enter the bidding, he is practically guaranteed to make a substantial profit from this market. What does he know that you do not?

Answer 1

In this type of bidding the bidding would usually begin at $1 and goes in single dollar increments. The professor is guaranteed a substantial profit because while the highest bidder will win the twenty dollar bill, the second highest bidder will also pay the professor what he/she bid as well so in this bid, there would be two losers and the professor would usually walk out with more than $30 in his pocket.

When the auction will reach $19, bidders will stop so the bidder with $18 will bid $20 to break even in which case he may win or the other student would bid higher but in the previous case the loser with $19 bid will also pay the professor so in this case, the minimum amount that professor will make out of this would be 20+19 = $39.