Question

Suppose we are interested in bidding on a piece of land and we know one other bidder is interested. The seller announced that the highest bid in excess of $10,000 will be accepted. Assume that the competitor's bid x is a random variable that is uniformly distributed between $10,000 and $15,200.

a) Suppose you bid $12,000. What is the probability that your bid will be accepted (to 2 decimals)?

b) Suppose you bid $14,000. What is the probability that your bid will be accepted (to 2 decimals)?

c) What amount should you bid to maximize the probability that you get the property (in dollars)?

d) Suppose that you know someone is willing to pay you $16,000 for the property. You are considering bidding the amount shown in part (c) but a friend suggests you bid $13,000. If your objective is to maximize the expected profit, what is your bid?

stay with your bid in part c, it maximizes expected profit. OR. Bid $13000 to maximize the expected profit

d2) What is the expected profit for this bid (in dollars)?

Answer 1