Question

This factor contributes to the winner's curse

a. you shaded your bid too much

b. your bid was not the highest

c. your estimate of the value of the object was the most optimistic

d. there were not many other bidders you had to beat out

Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. If Samantha is offered an insurance policy for her house to protect her from loss at $3,000, what is her expected wealth?

a. $99,000

b. $97,000

c. $80,000

d. $87,000

Answer 1

Answer 1. c. your estimate of the value of the object was the most optimistic

reason- Winner's curse reaults from overestimating the value of the item auctioned. So that even when you win you have overpayed for the item. So it is generally a curse faced by winners of auctioned goods.

Answer 2. Expected wealth= $97000

reason- There is 30% chance the wealth will be $100000-$10000=$90000

70% chance that wealth will be $100000.

Expected wealth= 30%*90000+70%*100000= $97000